Too big to fail

[Al_U_Card]

Because when you take a dollar from a million people they say litte. Just don't try to "take" a million dollars from one (rich) person...

[Al_U_Card]

FNMA is NOT a traditional mortgage lender

 

In 1968, Fannie Mae was re-chartered by Congress as a shareholder-owned company, funded solely with private capital raised from investors on Wall Street and around the world. "

OMG

 

So in 68 RM (Prescott of the Brown Bank is my backer) Nixon gave the power over mortgage financing to the "people" as shareholders.....oh yeah THOSE people, and we know how concerned THEY are for the mortgage holders in general...

[sceptic]

Let us not be naive, the people buying these mortgages from banks are not innocent niave Joe's. smile.gif

 

 

Actually, a lot of people could be naive, Fannie may or may not be good and its smaller brother Freddie are not where people expect their mortgages to be, If I take out a mortgage with a bank, I always expected that that bank would hold my mortgage (very naive of me) and earn interest from my regular payments, no one ever explained to me, that my debt would be brought by some appropriately named Fannie, and then sold off to investors (who we all know just want as much profit as possible, even whilst having thier investment guarenteed by said Fannie and herein possibly lies part of the problem)

 

All in all, I doubt many joes in the street expected thier mortgages to be hawked around all and sundry trying to cream off as much profit as possible, just to enable the banks to keep lending the same money, you can only lend the same dollar so many times before someone wants them all back at the same time or someone runs out of dollars

 

In fact Fannie Mae, buys mortgaes and then sells them on to investors, so I cant accept that the ordinary joe, does not have mortgages with Fannie and Bro, Fannie and Fred, have probably owned every americans mortgage at some time or another if only briefly

[mike777]

Let us not be naive, the people buying these mortgages from banks are not innocent niave Joe's. smile.gif

 

 

Actually, a lot of people could be naive, Fannie may or may not be good and its smaller brother Freddie are not where people expect their mortgages to be, If I take out a mortgage with a bank, I always expected that that bank would hold my mortgage (very naive of me) and earn interest from my regular payments, no one ever explained to me, that my debt would be brought by some appropriately named Fannie, and then sold off to investors (who we all know just want as much profit as possible, even whilst having thier investment guarenteed by said Fannie and herein possibly lies part of the problem)

 

All in all, I doubt many joes in the street expected thier mortgages to be hawked around all and sundry trying to cream off as much profit as possible, just to enable the banks to keep lending the same money, you can only lend the same dollar so many times before someone wants them all back at the same time or someone runs out of dollars

 

In fact Fannie Mae, buys mortgaes and then sells them on to investors, so I cant accept that the ordinary joe, does not have mortgages with Fannie and Bro, Fannie and Fred, have probably owned every americans mortgage at some time or another if only briefly

Ok so your regulation you want is if someone loans you money they can never sell your IOU unless you say it is ok........Let me get this straight.....not only do you want to borrow money from me but now you want to demand I cannot sell your IOU to someone else.

 

I think I will loan to someone else or if I do loan to you I will charge you double interest. :)

[Mbodell]

Fannie Mae provides stability,

 

cough

It is adding artificial stability to the housing market right now. Without the GSE the housing crash would likely be more severe/quicker as there would be even fewer buyers and prices would go down faster. Now, arguably, that would be a good thing as a fast crash may be better than a slow and lingering one, but I think the GSE are adding to the stability of housing prices right now.

[jtfanclub]

Without the GSE the housing crash would likely be more severe/quicker as there would be even fewer buyers and prices would go down faster.

I suspect it would be nonexistent. The price of mortgages would be so bad that nobody would profit by selling them.

 

I suspect most of the people buying these didn't have much of a clue. Pensions, large funds, and suchlike. They saw a history of profit for these instruments so they bought them without understanding them. Around 2004, somebody did a study showing that if the housing market went down all of these bundle derivitives would collapse. I suspect the smart money ran for the hills, leaving us poor fools with pensions and mutual funds to hold the bag.

[kenberg]

Let us not be naive, the people buying these mortgages from banks are not innocent niave Joe's. smile.gif

 

 

Actually, a lot of people could be naive, Fannie may or may not be good and its smaller brother Freddie are not where people expect their mortgages to be, If I take out a mortgage with a bank, I always expected that that bank would hold my mortgage (very naive of me) and earn interest from my regular payments, no one ever explained to me, that my debt would be brought by some appropriately named Fannie, and then sold off to investors (who we all know just want as much profit as possible, even whilst having thier investment guarenteed by said Fannie and herein possibly lies part of the problem)

 

All in all, I doubt many joes in the street expected thier mortgages to be hawked around all and sundry trying to cream off as much profit as possible, just to enable the banks to keep lending the same money, you can only lend the same dollar so many times before someone wants them all back at the same time or someone runs out of dollars

 

In fact Fannie Mae, buys mortgaes and then sells them on to investors, so I cant accept that the ordinary joe, does not have mortgages with Fannie and Bro, Fannie and Fred, have probably owned every americans mortgage at some time or another if only briefly

I think that most troubles of the OJs (Ordinary Joes) is that they cannot handle their debt. What the bank did with their debt is not directly troubling to them.

 

True, the bank was willing to make a silly loan because they knew they could toss it off to someone else, but it is the having of the loan, not the moving of the loan, that gives OJ his trouble.

 

Now was he naive? There are quite a few people out there who know that they should look into things a little more. They also know, or at least suspect, that if they did they would not like the answers. The bank says they can have the loan because they are going to foist it off on someone else, the borrower asks no questions because he fears that a careful analysis would show he cannot afford it, and there we are.

 

Yes, I know. Some folks encounter obvious misfortune. But that has always been true. The great increase in numbers cannot be explained by something that has always been the case.

 

BUT Given that there is a sucker born every minute and given that there are a goodly number of jackals out there, what to do to keep this predator/prey system from bring us all down?

 

Transparency sounds good. Depending on what it means and how it plays out.

[mike777]

Without the GSE the housing crash would likely be more severe/quicker as there would be even fewer buyers and prices would go down faster.

I suspect it would be nonexistent. The price of mortgages would be so bad that nobody would profit by selling them.

 

I suspect most of the people buying these didn't have much of a clue. Pensions, large funds, and suchlike. They saw a history of profit for these instruments so they bought them without understanding them. Around 2004, somebody did a study showing that if the housing market went down all of these bundle derivitives would collapse. I suspect the smart money ran for the hills, leaving us poor fools with pensions and mutual funds to hold the bag.

 

Please keep in mind those with pension plans or those who own large mutual funds expect those who run them to be smart and good investment managers.

 

Granted if you got idiots for investment managers all you can do is complain to the trustees to fire them.

 

If you got idiots running your mutual fund, then either get them fired or sell and move to another fund.

 

OTOH keep in mind we expect these managers to take on certain types of risks.

 

But I agree if they buy a millions or billions of mortgages we expect them to do due dilegence not just look at some rating agency.

Some simple common sense things.

1) Were the borrowers job and income confirmed.

2) What other borrowing do they have?

3) Do we have confirmation of the collateral. In other words let us not loan 500,000 on a house really worth 100,000 or one that does not exist. B)

4) We all know if interest rates rise on variable rate mortgages, defaults rise.

5) We all know if alot of people lose their job, defaults rise. This is not rocket science .

6) Granted a lot of complicated MBS derivates is rocket science. :)

[mike777]

"Transparency sounds good. Depending on what it means and how it plays out."

 

Let me try and use a bridge analogy.

1) We want to know as much as possible about the opp hands and partner's hand.

2) We will never have 100% perfect information

3) For most of us even seeing all 52 cards may not help that much. B)

4) Sometimes the opp commit fraud.

5) Sometimes we are too tired to fully understand what we are told

6) Hopefully with more transparency we will have fewer disasters but still more than zero :)

7) We all agree we need some bridge regulations but at some point we will simply ignore/forget the more silly ones......see same comparison for business. :)

8) As with most of life sometimes we just trust and use trial and error and hope we survive....see comparisons in business. :)

[matmat]

I could have sworn that is what they said about the Titanic.

[onoway]

"Let me try and use a bridge analogy."

Who answers when you holler for "DIRECTOR!!" ? B)

[mike777]

"Let me try and use a bridge analogy."

Who answers when you holler for  "DIRECTOR!!" ?  B)

Easy...you Answer!

 

But if you are afraid of Life and need the government or need a Daddy you will always whine and be disappointed when they fail to protect you.

 

:)

[sceptic]

I think I will loan to someone else or if I do loan to you I will charge you double interest. smile.gif

 

I am talking social responsibilty here, I am not an economist, I think everyone has a right, to some security for their basic needs in life, Home and wages,etc, if people are lucky enough to have extra left over to invest, they should be free to invest in as risky an investment as they want and if they want yo pay people huge commisions and bonuses for increasing their wealth (I describe wealth as surplus to basic needs for living in the modern world) then, if it all goes tits up, that is a risk, they have a choice about and can do something about and blame no one else if it goes wrong, they sure as hell do not moan when the gains are coming thier way

[sceptic]

Fannie Mae provides stability,

 

cough

It is adding artificial stability to the housing market right now. Without the GSE the housing crash would likely be more severe/quicker as there would be even fewer buyers and prices would go down faster. Now, arguably, that would be a good thing as a fast crash may be better than a slow and lingering one, but I think the GSE are adding to the stability of housing prices right now.

yes, right now maybe they are, but if brokering peoples lives, was not happening, the market would have been stable through some other method, just because Fannie and Freddie are being proped up now, does not mean that we shouuuld be grateful andf happy, nor should we accept that maybe it is a flawed system

[mike777]

I think I will loan to someone else or if I do loan to you I will charge you double interest. smile.gif

 

I am talking social responsibilty here, I am not an economist, I think everyone has a right, to some security for their basic needs in life, Home and wages,etc, if people are lucky enough to have extra left over to invest, they should be free to invest in as risky an investment as they want and if they want yo pay people huge commisions and bonuses for increasing their wealth (I describe wealth as surplus to basic needs for living in the modern world) then, if it all goes tits up, that is a risk, they have a choice about and can do something about and blame no one else if it goes wrong, they sure as hell do not moan when the gains are coming thier way

Wayne pls back up

1) if everyone is promised a home ok....np

2) if everyone is promised a living wage ok np

3) but who promises this?

 

 

 

We are all old enough to understand.....governments fail. See worldwide governments last 60 years. B)

 

Simple example.....many say United Kingdom may disappear in our children..grandchildren lives........ok......in that case who promises all of this?

 

Ussr ..gone

east germany gone

south vietnam gone

checkoslava...gone

yugoslavia ...gone...

see africa ..many gone

see south american many gone

see central america ..many gone

[sceptic]

no one promises that exactly as far as I am aware, but I also do not think that anyone promises, that if large institutions have financial problems, the government should bail them out, I always thought a freemarket was what we lived in, all I can see is a subsidised market place, subsidised by us all

 

Why not let Fannie and Freddie do what everyone else has to do when they get in financial difficulties, sell off their assets for what they can get for them, though, I do not think they have much to sell off, in comparitive terms, after all they are a middle man, and we all know, cut out the middle man and things become cheaper

 

and as for the guarentees they provided to the people they sold the loans off to in the first place, well if they can't pay or back them up, the investors lose out, which to my way of thinking is tough luck, you took your chance and it did not pay off, that is what it is all about "risk"

 

Risk is

• noun 1 a situation involving exposure to danger. 2 the possibility that something unpleasant will happen.

 

why did these people not insure against (or did they not need to because they know the governemt would bail them out)

 

Why did some one allow them to have so much exposure that if they failed, (through no fault of thier own if you want to look at it like that), they would drag the economy down with it (or at least be another factor in worsening the situation.

 

All the investors that brought the bundled mortgage packages, have a protection that if the mortgagee defaults for what ever reason, F&F guarentee to pay the investors thier percentage, taking out a fee for doing so......... Where was the regulation that covered how much equity they would need to have in place to weather out a recession or major slump in the economy

[mike777]

In the last few years rescue efforts have been made with various large financial  entities on the grounds that their failure would be a calamity. Fannie and Freddie are the latest in a long line going back, at least, to the S&Ls.

 

It is sometimes argued that "letting the market work" is better than "government regulation". Perhaps true, as long as the market is allowed to work. However, if an entity is seen as being "too large to fail" then we are announcing that the market will not be allowed to work.

 

Questions:

 

Is it not logical that any entity that is too large to fail must then be properly regulated so that it does not fail and also does not need to be bailed out?

 

Stepping away from specific instances such as FNMA and looking at the general question, have McCain and Obama made it clear where they stand on this? So far I mostly have heard a lot of talk about shutting barn doors after the horses, the cows, and everything else is long gone.

 

Of course some may oppose any intervention and suggest just letting the chips fall as they may. Perhaps so, but it's a little scary and the gov folks do not seem to be up for this. I'm not sure that I am either.

 

 

I'm trying to work this out in my head and I am not sure where I come down. Generally I prefer a light touch with regulation but I am getting a little annoyed at the continuing mantra that we have to give my tax dollars to a bunch of fools who have screwed up just so they don't bring the whole structure down with them when they fall.

Granted call me fussy with words and what they mean.

 

But your post is full of them.

 

Words have meaning...call me fussy but ok.....

 

 

 

What the heck are you talking about?

 

:)

 

1) fail

2) steeping away

3) calmitity

4) failure

5) let the market work

6) regulation,which ones?

7) bailed out...what the heck does that mean?

8) market not allowed to work....?

9 let the chips fall where they may?"

1o) inteverntion?

11) light tough vs what? hard touch...medium touch.....gentle touch?

 

 

ok ok I could add alot more ...trust me I could add a lot more

 

My point is.......almost all of your words can be debated for what they mean....B)

[hrothgar]

WBUR's "On Point" devoted an hour to this Monday morning

 

Well worth listening to

 

http://www.onpointradio.org/shows/2008/07/...0714_a_main.asp

[kenberg]

In the last few years rescue efforts have been made with various large financial  entities on the grounds that their failure would be a calamity. Fannie and Freddie are the latest in a long line going back, at least, to the S&Ls.

 

It is sometimes argued that "letting the market work" is better than "government regulation". Perhaps true, as long as the market is allowed to work. However, if an entity is seen as being "too large to fail" then we are announcing that the market will not be allowed to work.

 

Questions:

 

Is it not logical that any entity that is too large to fail must then be properly regulated so that it does not fail and also does not need to be bailed out?

 

Stepping away from specific instances such as FNMA and looking at the general question, have McCain and Obama made it clear where they stand on this? So far I mostly have heard a lot of talk about shutting barn doors after the horses, the cows, and everything else is long gone.

 

Of course some may oppose any intervention and suggest just letting the chips fall as they may. Perhaps so, but it's a little scary and the gov folks do not seem to be up for this. I'm not sure that I am either.

 

 

I'm trying to work this out in my head and I am not sure where I come down. Generally I prefer a light touch with regulation but I am getting a little annoyed at the continuing mantra that we have to give my tax dollars to a bunch of fools who have screwed up just so they don't bring the whole structure down with them when they fall.

Granted call me fussy with words and what they mean.

 

But your post is full of them.

 

Words have meaning...call me fussy but ok.....

 

 

 

What the heck are you talking about?

 

:)

 

1) fail

2) steeping away

3) calmitity

4) failure

5) let the market work

6) regulation,which ones?

7) bailed out...what the heck does that mean?

8) market not allowed to work....?

9 let the chips fall where they may?"

1o) inteverntion?

11) light tough vs what? hard touch...medium touch.....gentle touch?

 

 

ok ok I could add alot more ...trust me I could add a lot more

 

My point is.......almost all of your words can be debated for what they mean....B)

Firstly, I do my best with words, as do we all. But I will try here.

 

 

1) fail 3) calamity 4) failure

We read in the news that the government must act because, for example, BS is to big to fail. I generally understand what they mean and I imagine that you do also. The argument is that unlike my hypothetical toothpaste company, if Bear-Sterns were to go belly-up (you need that one explained?) the consequences to the US and maybe the world economy would be extremely severe, so severe in fact that government feels they must act ("government acting" is not quite an oxymoron) to avoid this calamity (meaning very seriously bad result).

 

 

2) steeping away

This probably should refer to tea, but by "stepping away from specific instances " I meant that I wanted to ask opinions, and maybe to look at McCain/Obama opinions (if any) on what should be the correct general approach for handling this matter in the future. We seem to be scrambling with no clear philosophy.

 

 

5) let the market work 9) let the chips fall where they may 8) market not allowed to work....?

 

 

Also common expressions. I intend this to refer to one possible approach. If Bear-Stearns gets in trouble through bad decisions, we will stand back and watch them go bankrupt. If financial experts warn of serious international repercussions, we will say that that would be too bad but we will not do anything.

 

 

7) bailed out...what the heck does that mean? 1o) intervention?

 

 

More common terms. I mean here an approach where the government puts up substantial amounts of cash, possibly returnable possibly not, to keep a company from going bankrupt.

 

 

11) light tough vs what? hard touch...medium touch.....gentle touch?

 

 

OK. Perhaps vague. But I was expressing my personal preference that less regulation is often better than more regulatin. Often, but not always.

 

 

6) regulation,which ones?

 

Which ones exactly! That is the question.

 

I find it a little tough to believe that "intervention" or "calamity" are mysterious words to you. Perhaps my general intent is unclear but reading it over I don't see why. But I will try to be clear:

 

 

For as long as I can remember (and Alzheimer's hasn't set in yet) there have been free market enthusiasts speaking of the excellent discipline of the free market. The general idea (as I am sure everyone knows) is that if we just let folks invest time, effort and money as they choose, the good approaches will bubble to the top and the bad ways will fall by the wayside. This thought is appealing to me. Very appealing, actually. . But with some large industries it appears that they are so much a part of our structure that even if they are run horribly they will not be allowed to fall by the wayside. The consequences of their failure would be so huge that we, through government, must act.

 

Obviously (to me anyway) this is heavily at odds with free market theory. The clash reminds me of a scene from Harvey: Lady to Jimmy Stewart: "You must struggle with reality". Jimmy Stewart: "For thirty years I have been struggling with reality and I am happy to say that I have won". I am asking: What are we to make of this clash between theory and reality? What do the candidates make of this?

[kenberg]

"Let me try and use a bridge analogy."

Who answers when you holler for  "DIRECTOR!!" ?  :unsure:

Easy...you Answer!

 

But if you are afraid of Life and need the government or need a Daddy you will always whine and be disappointed when they fail to protect you.

 

:)

Pam can of course speak up for herself here but I see no whining or fear of Life (or of life). You can insult people, piss them off, shut them up (well maybe not this last one) but it hardly changes any minds. What is your intent here?

[jtfanclub]

Why not let Fannie and Freddie do what everyone else has to do when they get in financial difficulties, sell off their assets for what they can get for them, though, I do not think they have much to sell off, in comparitive terms, after all they are a middle man, and we all know, cut out the middle man and things become cheaper

They aren't just a middle man.

 

Normally, they buy mortgages, repackage them, and eventually sell them. They just keep the market smooth. But right now, nobody else is buying mortgages. As a result, they own or guarantee HALF the mortgages out there, at least in terms of dollars. Six TRILLION dollars worth of mortgages. It's literally comparable to the size of the national debt. It's way beyond staggering. I'm curious as to which is larger...the assets of Fannie and Freddie, or the actual (not paper) assets of all the corporations in the country combined.

 

Why can't they just have Fannie sell off?

 

So, let's say that you went to the bank for a mortgage. Bank says no problem, at 20%. You point out the prime is nice and low, why so high for the mortgages? And the bank says...Fannie's having a fire sale on mortgages. Why should they go through the bother of making a new mortgage when they can just buy a used one cheap? It's not like they can resell the mortgage, not when the market is flooded by Fannie.

 

If the mortgage market failed, well, banks could always issue and keep mortgages and not try to resell them. But Fannie and Freddie selling off would kill the mortgage industry. Nobody would be able to get a mortgage. It's entirely possible that nobody would be able to get a loan, period. Banks would just use all of their money to buy these cheap mortgages and sit back and rake in income. And if nobody can get a loan, well, capitalism is based on loans and capital formation. Think Great Depression. Probably worse, actually. Imagine the dollar becoming next to worthless, going to back to a barter system, and all of our business being owned by foreign corporations.

 

Yeah, it's that bad.

 

We have all sorts of regulations keeping banks from just buying an infinite number of properties by going infinitely in debt. But those rules didn't apply to Fannie and Freddy. So they ended up owning....well, almost everything.

 

This is going to be very, very tricky.

 

EDITED TO ADD:

 

Most of the mortgages that Fannie and Freddie have are good loans. The problem is that the mortgages pay out over 20 or 30 years, and Fannie and Freddie have to pay for these loans that allowed them to buy the mortgages in a matter of weeks and months. If they do have a fire sale, these will be immensely profitable. It's just that they hold so very much that the market can't absorb it right now. The bailout is mainly to allow Fannie and Freddie to sell these slowly so that the market isn't overwhelmed.

[kenberg]

WBUR's "On Point" devoted an hour to this Monday morning

 

Well worth listening to

 

http://www.onpointradio.org/shows/2008/07/...0714_a_main.asp

I'm listening right now and yes, it is very interesting.

 

 

One of the guests, Robert Samuelson, writes for Post/Newsweek. In a column this morning on globalization he ominously writes:

 

"Today's global economy baffles experts -- corporate executives, bankers, economists -- as much as it puzzles ordinary people.

 

On the NPR program Samuelson is saying that an assumption, wrong in retrospect, was that housing prices would keep going up forever. Good God! I moved three years ago, selling an overpriced house and buying an overpriced house. I told the agent who listed my house that I didn't need to get the top dollar, I needed to sell before the prices crashed as I was sure they would. Our house had doubled in price in about three years. Only an idiot would think that to be sustainable. As long as you are buying and selling comparable units in the same market, the price is no big deal, but some sense is needed.

 

Apparently there wasn't much.

 

 

Samuelson, who I think is always worth paying attention to, is now pointing out more of what should be obvious: You cannot get everyone into home ownership unless you make some loans that make little sense. Seems obvious to me. Why this wasn't obvious to the banking community is a question that they should be asked. The answer appears to be that it was obvious but they saw the opportunity to make money from the loans anyway while sticking the rest of us with the consequences. Respect for the banking community is gone, and will not be returning soon.

[onoway]

"Let me try and use a bridge analogy."

Who answers when you holler for "DIRECTOR!!" ? unsure.gif

 

Easy...you Answer!

 

But if you are afraid of Life and need the government or need a Daddy you will always whine and be disappointed when they fail to protect you.

 

 

:unsure: Vigilante justice, anyone?

[Al_U_Card]

Defaulting on the Chinese debt might be considered and act of (economic) war...

 

Either way, once the Chinese middle class reaches 500 million individuals, they won't need the US as a market and they will print their own money and send the People's Army (of) bill collectors to get that debt.

 

The USofA will have to downsize to the Meltdown of America.

[y66]

Isn't Fannie Mae essentially a federally chartered monopoly intermediary in the residential home mortgage market, i.e., the only game in town?

 

If they close their doors, how long will it take for other institutions to take up the slack? What effect will this have on the availability of capital in this market in the short term? On the supply and demand for new homes? On employment in the construction sector? On the value of homes and overall consumer demand in the U.S. and other countries? On the value of mortgage backed securities and the capital reserve requirements of highly leveraged and even sensible financial corporations who own these securities? On the general availability of capital in all markets, U.S. and foreign? On overall levels of employment, in the U.S. and elsewhere?

 

As posted above, nobody really knows what will happen.

 

Personally, I'm willing to see what happens if Fannie Mae runs out of capital. But if I were in Secretary Paulson's shoes, I don't think I would be serving the public interest by taking such a gamble. This is a time for pragmatism, not ideology.

 

I am delighted that we have a guy like Paulson at the helm at the moment. I am also delighted that we have a guy like Barney Frank on the Democrats' side of the aisle. These guys, and others like them, are solid citizens and they are doing a heck of a job improvising ways to get through this mess, imo.

 

re: OP's question: is more regulation needed? Kenneth Griffin has some useful suggestions on this front.