The Housing Bubble

Reality… vs …It’s contained now babeeeeeeeeeeeee!

National average family income = $50,750 vs National average new home = 3,225 sq ft

“You’ve got to try and separate this GSE deal and what’s going on with the banks (shares) from what’s going on in the economy. That’s not changed because of what has happened with Fannie Mae and Freddie Mac,” said Kenneth Broux, financial markets economist at Lloyds TSB in London.

China and Japan hail U.S. mortgage rescue as doubts linger:

http://www.reuters.com/article/ousiv/idUSN0527106320080908?pageNumber=3&virtualBrandChannel=0

“The Treasury took $1 billion in preferred senior stock in each company, but its equity stake could reach as much as $100 billion in each.”

Is that what they mean by 100 to 1 “leverage”?

Fred and Fan
Went up the hill
To fetch a pale looking backstop.
Fred fell down
And broke his crown
And Fan came tumbling after.

Up Fred got
And Hank did trot
As fast as he could caper
Went to Fed
And plastered his head
With speeches and bad paper.

I haven’t posted for a while, but I’m still reading, and yesterday’s Bits Bucket was just what the doctor ordered for me. Anytime I think this market is ‘just’ a little off kilter, I can always count on the level heads here to remind me just how bad this can really get.

The mainstream news is on this as a good thing, and pointing out the lower mortgage rates this will mean. That’s short-sighted, of course.

So, who’s got a guess as to when the mortgage rates will revert to 6%+ and continue on their way up as warranted by the risks?

Bloomberg

Fannie, Freddie Credit-Default Swaps May Be Settled (Update3)

Snips…

Thirteen “major” dealers of credit-default swaps agreed “unanimously” that the rescue constitutes a credit event triggering payment or delivery of the companies’ bonds, the International Swaps and Derivatives Association said in a memo obtained by Bloomberg News today. Market makers for the privately traded contracts will discuss how to settle them in a conference call at 11 a.m. in New York, the document said.

“This is a big deal,” said Sarah Percy-Dove, head of credit research at Colonial First State Global Asset Management in Sydney. “The market is not experienced at settling a credit event for a name of this size, so it is a bit of an unknown.”

…

Under the U.S. plan, the Treasury will get $1 billion of senior preferred stock in coming days, with warrants representing ownership stakes of 79.9 percent of Fannie Mae and Freddie Mac. The government will receive annual interest of 10 percent on its stake…(cont’d)

Second in line for monies are Preferred then common holders.

This will end well.

Pass the popcorn Neil - unwinding CDOs -

Leigh

Freddie and Fannie should have been allowed to fail. They were traded companies, and as such should have been exposed to the same risks as any other public corporation. But the deed is done and now 50% of the mortgages in the US are now under the control of the US government.

So here’s my thoughts. If any good could be gleaned from this, its that if the US government is now going to control 50% of the mortgages, then perhaps it is in their best interests to engineer a lending system that more closely ties affordability to actual incomes. This will likely come in the form of stricter loan requirements such as providing loans to buyers with incomes that support the price. If such a system were setup with Freddie and Fannie, this could over time remove much of the speculative, purely investment nature of housing. That’s just my guess. Both of these companies were grossly mis-managed over the years. Perhaps the US will clean house.

“The most costly of all follies is to believe passionately in the palpably not true. It is the chief occupation of mankind.”

H.L. Mencken

The Federal Highway Trust Fund was declared bankrupt Friday, prompting Arizona transportation officials to delay plans for several major construction projects.

The fund, which gets part of its money from federal gasoline tax, is expected to be empty by the start of October.

http://www.azcentral.com/12news/news/articles/2008/09/05/20080905highwaymoney09052008-CR.html

RE: One has to wonder if they are intentionally trying to run this Country into the ground. No one can be this stupid, can they?

The US economy is 70% consumption driven.

For the last 15 years J6P has been maintaining the illusion of a static standard of living with his or her HELOC ATM.

The government is now so desperate to keep this finanical shell game afloat that they’ve nationalized the housing finance market.

But the nationalizing of the GSE’s is just the first step.

Next they will be taking control over actual foreclosure inventory.

Eventually they will pass off this inventory to deserving minorities @ subsidized payment levels, with the same bleating caveat that home ownership fosters higher confidence and self esteem.

In other words all these foreclosed chucks are gonna probably get their houses back with perhaps a government check to compensate for the previous emotional upset caused by the foreclosure process due to unscrupulous lenders

They will then send over a government sanctioned “appraiser” a year later to appraise a magical $100k increase (since this was an initial distressed acquiring procedure) which then provides the means for the owners to HELOC the increase, so as to buy more Wal-Mart Chinese made shit, lotto tix, trips to the casino’s, and a set of new wheels to keep the consumption train rollin’.

Coincidentally, “the government appraiser” will also be controlling valuation levels wich is really the name of game.

1984 here we are.

I can see China’s firm hand guiding us now…

Until the olympics came and went, their hands were tied up on account of not wanting to lose face.

Now, they just don’t want to lose face value~

BFD…. The only thing salvaged in the F&F drama is the recycle mechanism to keep the flow of $$$ coming from China and even with that I’m skeptical. China needs our $$$ as much as we them to keep buying our shitty paper.

There seems to be a lot of confidence in the BB yesterday that F&F will “go away”. I want to be clear about my position that while F&F might go away in form, the substantive issue is whether the same operations continue (or even expand) as a dept of the govt. Whether those operations continue in form as Fannie Mae, Hammerin’ Hank’s Home Mortgage or any other name doesn’t really matter.

Haven’t multiple pols stated multiple times that decreasing house prices (which would be the result of tightened lending standards) is a bad thing? Doesn’t that imply that one of their goals is to try to prop up housing (i.e. “fix” the “housing crisis”)?

If those are true, I don’t see uncle sam tightening lending standards, in fact I see them making more money available, not less. It’s already been stated that they are prepared to give both maes $100 billion each.

Given that Hank P earlier stated he needed a blank check which would not be needed and which he has now used, if he now says they are prepared to hand over 100B, then you can rest assured every bit of that will go into those organizations, and likely more. So that’s a 200B increase right off the bat you can count on.

One Yahoo article is also saying that the govt intends to decrease the holdings of these organizations until they reach 500B combined. Where are those holding going to go? Any bets on whether they are sold in the market at FMV or moved to another govt balance sheet? Again, the issue of form vs. substance. What are they really going to do?

Good news! They just announced on CNBC that it’s the beginning of the end of the credit crunch!

The US taxpayer sure is powerful.

I’m watching CNBC this morning and several times they have mentioned that they now expect mortgage rates to fall by 1%.

I don’t see why this should happen. Fannie and Freddie are now going to increase their lending standards further. They also have to reduce their mortgage portfolio by ~60%. Private banks are loathe to lend until house prices reach their bottoms.

So why should mortgage rates fall ?

Aguirre Wants to Make San Diego a Foreclosure Sanctuary
Last Updated: 09-08-08 at 7:39AM

With the latest news that the federal government is taking over mortgage giants Freddie Mac and Fannie Mae, City Attorney Mike Aguirre wants the city council to make San Diego a foreclosure sanctuary.

The resolution he is seeking would ask all lenders to stop foreclosing on certain homes. The resolution would not require lenders to comply.

If it passes, it would be the first such sanctuary measure approved in the state.

The resolution is scheduled on the council’s agenda at 2 p.m. Monday.

Rolls eyes. Good night Irene.
Leigh

http://www.cbs8.com/stories/story.139717.html

US Is “More Communist than China”: Jim Rogers

http://www.cnbc.com//id/26603489?__source=yahoo%7Cheadline%7Cquote%7Ctext%7C&par=yahoo

If you’ve just eaten your Breakfast, you may not want to see this:

http://www.dpagroundswell.org/

It’s a website to start a grass-roots campaign to “save” seller-financed DPA.

Since the IRS ruled that these programs were a scam, this is basically a website supporting a massive tax scam.

http://www.nytimes.com/2008/09/08/opinion/08krugman.html?ref=opinion

“As the economist Irving Fisher observed way back in 1933, when highly indebted individuals and businesses get into financial trouble, they usually sell assets and use the proceeds to pay down their debt. What Fisher pointed out, however, was that such selloffs are self-defeating when everyone does it: if everyone tries to sell assets at the same time, the resulting plunge in market prices undermines debtors’ financial positions faster than debt can be paid off. So deflation in asset prices can turn into a vicious circle. And one consequence of what he called a “stampede to liquidate” is a severe economic slump.

That’s what’s happening now, with debt deflation made especially ugly by the fact that key financial players are highly leveraged — their assets were mainly bought with borrowed money. As Paul McCulley of Pimco, the bond investor, put it in a recent essay titled “The Paradox of Deleveraging,” lately just about every financial institution has been trying to reduce its leverage — but the plunge in asset values has nonetheless left these institutions with more debt relative to their assets than before.”

“To compel a man to subsidize with his taxes the propagation of ideas which he disbelieves and abhors is sinful and tyrannical.”

“The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants.”

Thomas Jefferson

nasdaq is now in the red and the dow is having trouble holding onto the rally. i thought this bail-out news was going to make everything all better?

Washington Post is doing a chat with Steven Pearlstein, their finance columnist right now. I posted the link earlier along with the comment I submitted, but it appears to have violated a rule, and hasn’t shown up.

Here is the link:
http://www.washingtonpost.com/wp-dyn/content/discussion/2008/09/07/DI2008090700715.html

A lot of the questions are “what happens to the preferred stock.” Lots and lots. Some say they are from overseas. I wonder how many people are going to be outraged over this. Do the Chinese have this stock as well as the bonds?

All that taxpayer risk for about a 1% short term boost in stock prices. Great idea. Not even the spin doctors could make the markets rejoice. My personal belief is that by continuing to highlight the housing meltdown, it scares off more housing “investors” rather than makes them feel like buying.

Realtors are still sleazy as hell. I looked at a few overpriced properties for kicks. When I showed hesitency based on a fear prices will fall further, they immediately tried to assure me no worries, prices are stabilizing but not in free fall. I then told them call we when they are in free fall because I want a deal. They were silent for a moment. Then said to me, I know a few houses that in the foreclosure process where you might be able to get them down 30% off peak. Perhaps they should make it easier on themselves and just ask what the person wants to hear before they try to spin.

Here’s what Denninger has to say, and I’m actually glad I’m not currently working and paying taxes:

“The Truth Chris (and the rest of you clowns) is that there is absolutely no reason for Americans to get up and go to work any more. Those of us who are prudent, who play by the rules, who buy our homes with solid, 30 year fixed mortgages and 20% down payments, who don’t lever ourselves up to our chins and cheat little old ladies out of every dime they have lose every time when you folks start this crap. We have our cost of living double, we have our homes pumped to insane levels and then destroyed, we lose our jobs and we lose our futures. Our children can’t afford college because your loose liquidity and money policies, which you cheer onward, cause college costs to rise to the point that our kids “graduate” with $100,000 or more in debt - a debt they can’t walk off from in bankruptcy, because you changed the laws to make that impossible. Our children are literally debt slaves and if you could get the rest of us to be that stupid we would be too.

The Truth is that Congress pulled this crap back in the 1970s and it destroyed many people in the Middle Class. I remember it and it sucked. I remember my families’ grocery bill doubling in a couple of years’ time, I remember gas prices more than doubling and I remember heating oil going up so fast that we had to finance a gas furnace replacement in order to avoid going broke one winter. You are responsible for it this time Chris - you and your cronies in Congress who gave a blank check to Paulson after he and Bernanke LIED to you. I told you he was lying and you didn’t listen.”

market-ticker dot denninger dot net

Haven’t been reading lately, so if anyone else already sang this song, well, just sing along again -
remember the old band called the Band? This song??

Take a load off Fannie,
take a load for free,
take a load off Fannie, and
put the load right on me.

“Baloney to the dude from CNBC. It still doesn’t change the fact that a purchaser of a 300K house is still gonna have a big monthly bill, whether it’s 5.25 or 6.25.”

Bingo. And purchasers will now have to fully document how they can actually afford that $300K house, and make a 20% down payment or prove adequate income to carry a higher LTVR. Oh, and no car payment or credit card debt allowed, by the way. How many people have those qualifications in light of record inventory, soon to get worse with more foreclosures?

One thing I’m wondering….now that the Gov’t has acknowledged how severe the housing mess is by their takeover of F&F, will there be ANY way to get financing about the $729K GSE limit in some of the coastal markets? Will this be the nail in the coffin for expensive markets like the Bay Area, Manhattan, etc?

Eight glorious years of controlling reckless spending, reducing the deficit, stabilizing the housing and financial markets, and keeping us out of foreign entanglements that skewer the middle-class taxpayers. All this and the strengthening of privacy laws and civil liberties! Thanks ‘publican’s

I wait with baited breath for melanoma man to croak and leave us with a moose hunter who will channel national policy through the will of G-O-D.

It’s only going to get better!

Plan Skirts Housing’s Biggest Troubles
Rescue Won’t Fix
Falling Home Prices,
Rising Foreclosures

Even amid Fannie and Freddie’s recent turmoil, Mr. Sorsby says, most of his company’s buyers who have decent credit scores, a job and a 5% down payment have been able to obtain mortgages, but the more marginal buyers — a large segment of the potential home-buying public — remain shut out of the market.

Mr. Sorsby and some economists doubt the newly bolstered mortgage companies will expand mortgage availability by loosening credit standards for subprime buyers.

http://online.wsj.com/article/SB122083205711308483.html?mod=yahoo_hs&ru=yahoo

We’ve had a little recovery in stocks this month. Why aren’t you optimistic?

Everyone is saying the future is so unsettled, but I think it’s much clearer than it usually is. If you think about the credit problems bigger picture, what you see is really clear. The current turmoil is just a symptom of a huge macro change that’s going on. For a generation, credit has been very easy. Markets over the last 25-year cycle have been productive with modest volatility. It’s been a great time to be an American citizen. You didn’t have to save because your house was increasing in value. You could spend more than you make, and that’s exactly what we did. Our wealth still increased due to the rising value of our real estate.

http://biz.yahoo.com/usnews/080902/02_adviser_get_out_of_index_investing.html

Just in time!
Al Qaeda is releasing it’s newest republican campaign commercial, a new terror tape is due out shortly just as soon as the CIA gets it out of post-production. It must be real cause I’m watching it on Fox News. Now watch for the old color coded terror level be elevate to orange or red just before the debates. Oh No!!! Who will protect me?

Great News!!! Homebuilder stocks are rebounding, according to CNBC. Maybe if we’re lucky, we’ll get back to the glorious bubble days in no time!

Buy now or be priced out forever!!!

Remember, remember, the 5th of September,
the day the U.S. went broke.

Quite the swing in WaMu today.

It looks like the US will accept reform (or is it the oversight) kicking and screaming. Does anyone know of a good reason our rating agencies our rejecting these reforms:

http://www.cnbc.com/id/26610174/for/cnbc/

Debt rating agencies reject EU regulation plan

BRUSSELS, Sept 8 (Reuters) - Credit rating agencies (CRAs) rejected plans by the European Union for a mandatory shake-up of the sector, but Brussels said it would adopt the measure in October to restore investor confidence hit by the credit crunch. Ratings agency Standard & Poor’s (S&P) said on Monday a voluntary global approach drawn up by the International Organisation of Securities Commissions (IOSCO) was the best approach to ensure global consistency. “If the proposals were implemented, CRAs such as S&P would face a situation in which regulators outside the EU would continue to expect them to comply with the IOSCO code while regulators within the EU would compel them to comply with new and EU-specific standards,” S&P said. But a spokesman for EU Internal Market Commissioner Charlie McCreevy said the legislative proposal was due to be formally adopted in October. The European Parliament and EU states will have final say. S&P, Moody’s and Fitch have been widely criticised as slow to warn investors about risks in securitised products they rated. Despite high ratings, the products became untradeable when U.S. home loans underpinning them went unpaid, forcing banks holding them on their books to write down over $400 billion.”

(my paragraph change for readability)
“The EU’s draft law would replace a voluntary code of conduct drawn up by IOSCO, which is made up of more than 100 national market watchdogs from Europe, the United States and Asia. The plan would force agencies to register if they wanted to operate in the EU, thereby bringing them under direct supervision. McCreevy published a draft law in July for consultation, saying the agencies had failed to “sniff the rot” in securitised products.”

Scary.

File under “Loose Lips Sink Ships (Even Faster Than They’re Already Sinkin’)”:

Shares of United Airlines lost nearly all their value Monday morning when a false rumor swept financial markets that the struggling carrier had filed for bankruptcy protection.

United shares traded at one cent in late morning on the New York Stock Exchange, down 99.92 percent, or $12.29. Its volume was more than 29 million shares. Trading in United shares was halted at 11:08 a.m., pending news from the company. Trading resumed at 12:30 p.m., and by early afternoon, shares had nearly recovered, down 70 cents, to $11.60.

http://cnnmoneytalkback.blogs.cnnmoney.cnn.com/2008/09/08/why-wall-street-loves-the-bailout/

If the responses to Paul Lamonica’s article are any indication, perhaps the masses ARE getting it…(click “back to story”, for the article)

Given the Fannie and Freddie news, it seemed like the modern-day version of The Ant and the Grasshopper was apropos:

http://www.chronwatch-america.com/articles/387/1/The-Ant-and-the-Grasshopper/Page1.html

(though the moral of the story - be careful how you vote - seems kind of useless at this point given that Paul’s out of the race)

BTW - the grasshopper in the housing story isn’t the lazy homeowner who didn’t earn the house he’s living in. It’s the lazy mortgage lender investors who didn’t do their due diligence in assessing the risk of their investments, and are the ones who really stand to gain from the ants (the taxpayers).

Anybody try the new carnage asada Fannie taco, or Freddie tamale?

2 for 99 Cents

WaMu got rid of their CEO today after 18 years:

http://www.reuters.com/article/marketsNews/idCAN0842480020080908?rpc=44

Is this the excuse they’ll use if WaMu should fail?

Whoo Hoo

Consumer borrowing slows to weakest in 7 months

Consumers this year have been forced to charge more of their purchases to credit cards as banks have tightened lending standards. That has curtailed use by consumers of home equity loans to finance their spending.

The concern is that all types of consumer spending will slow dramatically in coming months as the boost from $106.7 billion in economic stimulus payments wears off.

http://biz.yahoo.com/ap/080908/consumer_credit.html

i wonder if it slowed by choice or if the banks are refusing to lend them the spending money?

The Second Coming (Slouching towards Bethlehem)

Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.
Surely some revelation is at hand;
Surely the Second Coming is at hand.
The Second Coming! Hardly are those words out
When a vast image out of Spritus Mundi
Troubles my sight: somewhere in the sands of the desert.

A shape with lion body and the head of a man,
A gaze blank and pitiless as the sun,
Is moving its slow thighs, while all about it
Reel shadows of the indignant desert birds.
The darkness drops again; but now I know
That twenty centuries of stony sleep
were vexed to nightmare by a rocking cradle,
And what rough beast, its hour come round at last,
Slouches towards Bethlehem to be born?
W.B Yeats

“I got an email from a Journalist asking why Fannie Mae (FNM) was trading at 71 cents (soon to be zero), while Freddie mac was trading at 80 cents (soon to be zero).

My answer?

“The management at Freddie i(s) vastly superior to that of Fannies . . . also, from what I understand, the accounting standards at FRE are far more rigorous than those used by FNM.”

The Big Picture

Best joke of the day.

Why bother registering as an Independent? No one cares what we think. This is a nailed down two party country through and through. Come voting time Independents pinch the nose, close the eyes, and vote for worse or worse than. What to do, what to do?

“Moreover, the bailout provides an important policy lesson – nothing truly bad can happen as long as the US Treasury is willing and easily able to float debt onto the global financial markets.”
Mr. Tim Duy

“Faced with credit losses, a central bank can either dig its way out through inflation or await recapitalisation by taxpayers.”
Mr. Kenneth Rogoff

“Watch out Mr. Bush! With the exception of economic policy and energy policy and social issues and tax policy and foreign policy and Supreme Court Appointments and Rove-style politics, we’re coming in there to shake things up.”
Mr. Tom Toles in cartoon lampooning McCain -Palin campaign WaPo

a few tidbits from today

“There is no analysis [about how much this will cost taxpayers.] We didn’t sit there with a calculator and figure this out.”

Henry ‘abacus’ Paulson, earlier today.

Bazooka collateral damage

US move triggers CDS default
By Aline van Duyn in New York

Published: September 8 2008 19:21 | Last updated: September 8 2008 19:21

One of the largest defaults in the history of the $62,000bn credit derivatives market has been triggered by the US government’s seizure of Fannie Mae and Freddie Mac, raising questions about how dealers will unwind billions of dollars worth of contracts.

Although the $1,600bn of debt issued by the troubled mortgage groups is regarded as safe after the US government’s move to take control of the companies, their move into “conservatorship” counts as the equivalent of a bankruptcy in the credit derivatives market.

This triggers a default on credit default swaps – instruments that provide a form of insurance on fixed-income assets. Dealers in the market are now working to settle these contracts.

Mr. Martin Wolf on how the U.S. housing market is now at risk of going down the way Japan did from 1990-2005, to the detriment of Uncle Sam’s involuntary army of taxpayer guarantors…

The U.S. government is now the mortgage market, with private mortgage finance to remain in the tank for 6, 7, 8, 9 or 10 years…

The situation at hand does not strike me personally as ripe for a quick recovery.

Perhaps we will see a “No more bailouts” competition from our presidential candidates going forward from here?

OPINION
We’ll Protect Taxpayers From More Bailouts
By JOHN MCCAIN and SARAH PALIN
September 9, 2008

The bailout of Fannie Mae and Freddie Mac is another outrageous, but sadly necessary, step for these two institutions. Given the long-term mismanagement and flawed structure of these two companies, this was the only short-term alternative for ensuring that hard-working Americans have access to affordable mortgages during this difficult economic period.

We are strong advocates for the permanent reform of Fannie and Freddie. For years, Congress failed to act and it is deeply troubling that what we are now seeing is an exercise in crisis management rather than sound planning, and at great cost to taxpayers.

We promise the American people that our administration will be different. We have long records of standing up to special interests and providing the leadership to change government and make it more accountable to the American taxpayer. In our administration, every agency and department will undergo rigorous oversight and review. We will require the highest standards of accounting, reporting and transparency ever demanded in government.

I am suddenly leaning Republican for the upcoming election.

REVIEW & OUTLOOK
Fannie Mae’s Patron Saint
September 9, 2008

Taxpayers are now on the hook for as much as $200 billion to rescue Fannie Mae and Freddie Mac, and if you want to know why, look no further than the rapid response to this bailout from House baron Barney Frank. Asked about Treasury’s modest bailout condition that the companies reduce the size of their high-risk mortgage-backed securities (MBS) portfolios starting in 2010, Mr. Frank was quoted on Monday as saying, “Good luck on that,” and that it would never happen.

There you have the Fannie Mae problem in profile. Mr. Frank wants you to pick up the tab for its failures, while he still vows to block a reform that might prevent the same disaster from happening again.

At least the Massachusetts Democrat is consistent. His record is close to perfect as a stalwart opponent of reforming the two companies, going back more than a decade. The first concerted push to rein in Fan and Fred in Congress came as far back as 1992, and Mr. Frank was right there, standing athwart. But things really picked up this decade, and Barney was there at every turn. Let’s roll the audiotape:

The U.S. has provided a wonderful role model for Communist governments to follow.

U.S. Plan Serves as Template For China to Bolster Its Markets
By JAMES T. AREDDY
September 9, 2008

SHANGHAI — The U.S. government’s decision to nationalize its home-mortgage giants may have given an unintentional endorsement to calls for China’s government to rescue its faltering financial markets.

In China on Monday, the U.S. Treasury’s takeover of Fannie Mae and Freddie Mac was front-page news. China’s banks sit on billions of dollars of the agencies’ debt securities. Chinese manufacturers, meanwhile, are keen to see the U.S. emerge from a housing crisis that has sapped spending power.

China’s central bank, the People’s Bank of China, praised Washington’s move, noting that “America’s financial market influences the stability of the global economic and financial markets.” It added that “the U.S. government should conscientiously bear the responsibility of safeguarding the stability of the financial market and protect the interests of investors.”

But the nationalization move was also fodder for those looking for government relief from China’s slowing economic growth and battered stock prices. So far this year, China’s stock market has lost 59% of its value and $2.86 trillion of its capitalization. Beijing has largely left the market to find its own floor, ignoring investors’ pleas for measures to reverse the losses. There is no sign yet of a change in that stance, but Washington’s latest action could change the calculus.

“It’s the government’s duty to intervene,” says Yu Yongding, a former central-bank adviser, who adds: “Now we have a very good example” that it is acceptable.

Isn’t dumping buckets of cash on Wall Street the primary goal of U.S. financial regulation? RTC soup, anyone?

MORE
AHEAD OF THE TAPE
By MARK GONGLOFF
Rescue Risks Setting Stage For New Woes
September 9, 2008; Page C1

The government’s rescue of Fannie Mae and Freddie Mac may have averted a financial meltdown, but it could create other unintended problems.

…lawmakers and regulators will eventually have to figure out how to shrink Fannie and Freddie, redistribute their portfolios and refine oversight of the U.S. mortgage business. Missteps could create loopholes that savvy investors can exploit, warns Anil Kashyap, a business professor at the University of Chicago and student of past financial crises.

In such regulatory soups new opportunities and risks are born. The Resolution Trust Corporation that ended the savings-and-loan crisis in the late 1980s led to a booming mortgage-securitization market that dumped buckets of cash on Wall Street. It also planted the seeds of the mess the government this weekend stepped in to solve.

Got stucco?

Condo Buyers In Florida Seek To Exit Deals
But Courts’ Rulings Suggest Many Investors May Be Stuck;
Defining ‘Olympic Style’ Pools
By MARKUS BALSER
September 9, 2008

With Florida awash in tens of thousands of empty or unfinished condominiums, many investors there are turning to the courts in an effort to cancel their contracts and recoup their deposits.

So far, they haven’t had much luck.

Pay back to our friends abroad who helped make the subprime lending crisis possible:

September 8, 2008
A US government bail-out of foreign investors

Hank Paulson’s effort to prop up Fannie Mae and Freddie Mac has various beneficiaries but few gain more than foreign investors.

One effect of the way the quasi-nationalisation is structured is that US institutions may well suffer more than foreign ones. In brief, it is good for overseas central banks and sovereign wealth funds but bad for US regional banks.

The exuberance in non-US markets this morning is a reflection of that fact. The government has had to step in to reassure foreign investors who have become huge buyers of agency debt, but has treated US equity holders harshly.

As Saskia Scholtes and Krishna Guha point out in the FT this morning, US regional banks could well pay the highest price:

Fannie and Freddie’s combined $36bn of preferred stock is widely held by US regional banks. These banks will be forced to take significant write-downs of their holdings.

Few banks have provided detailed disclosures on the extent of their holdings in Fannie Mae and Freddie Mac, but among those that could be most affected are Gateway Financial Holdings and Midwest Banc Holdings. According to recent research by analysts at Keefe, Bruyette & Woods, both banks have exposure that amounts to more than 30 per cent of their tangible capital.

Meanwhile, foreign holders of agency debt including that issued by Fannie and Freddie have been given a cushion. The US government has not given full sovereign backing to senior and subordinated debt but it has provided comfort.

This is very significant for all the foreign investors, including foreign governments and wealth funds that have piled into agency debt over the past 15 years, regarding it as a substitute for US Treasuries.