Toward the end of last week, the
stock market declined precipitously. Within the
space of a few days, we learned that href="http://www.nytimes.com/2008/09/06/business/economy/06econ.html?partner=rssuserland&emc=rss&pagewanted=all">unemployment
is way up, more than href="http://www.housingwire.com/2008/09/05/prime-arms-set-tone-for-troubled-mortgages-in-q2-mba/">nine
percent of U.S. mortgages were delinquent or in foreclosure,
closed the 11th bank so far this year (two
were closed in 2007, none in 2006 or 2005), and href="http://www.bloomberg.com/apps/news?pid=20601087&sid=a0Lqw8FFI9hU&refer=home">retail
sales are down; on the international scene, href="http://www.hemscott.com/news/static/tfn/item.do?newsId=67010079779199">yen
carry trades are collapsing, and the People’s Bank
of China (China's central bank) may have to href="http://www.nytimes.com/2008/09/05/business/worldbusiness/05yuan.html?ref=business">turn
to the Chinese Treasury for money.
decline in the US stock market, itself, is not necessarily a bad thing.
We are getting accustomed to seeing large swings.
The problem is that
there is too much bad news happening all at once.
stocks at 2-year low, euro tumbles
is not a flight to quality, it is simply a flight," said Alan Ruskin,
chief international strategist at RBS Greenwich Capital.
unwinding is taking place globally and it is becoming a big
Tokichi Ito, deputy general manager of foreign exchange at the Trust
& Custody Services Bank in Japan.
Another bit of bad news that came out, around that time, is that Fannie
Mae and Freddie Mac have systematically understated their losses.
They did this by changing their accounting methods.
The change itself was not illegal, but it means that the two
companies are href="http://www.nytimes.com/2008/09/07/business/07fannie.html">worse
off financially than had been known to the public:
Then, last week, advisers from Morgan Stanley
hired by the Treasury Department to scrutinize the companies came to a
troubling conclusion: Freddie Mac’s capital position was
initially imagined, according to people briefed on those findings. The
company had made decisions that, while not necessarily in violation of
accounting rules, had the effect of overstating the firm’s
resources and financial stability.
Indeed, one person briefed on
the company’s finances said Freddie Mac had made accounting
that pushed losses into the future and postponed a capital shortfall
until the fourth quarter of this year, which would not need to be
disclosed until early 2009. Fannie Mae has used similar
methods, but to
a lesser degree, according to other people who have been briefed.
Mike Shedlock has some href="http://globaleconomicanalysis.blogspot.com/2008/09/gses-and-other-financial-institutions.html">interesting
comments on that.
been argued that, while the accounting changes were legal, it
may have been fraudulent for the companies to continue to do business
while misrepresenting their financial stability.
Shortly after the announcement that Fannie and Freddie are in worse
shape, both were href="http://seekingalpha.com/article/94328-frannie-bailout-private-profit-socialized-risk">placed
under Federal conservatorship.
Although the US Government has stated that they will endeavor to
minimize the cost of the bailout to taxpayers, there are plenty of
people who are highly skeptical. Ilargi, writing at href="http://theautomaticearth.blogspot.com/2008/09/debt-rattle-september-7-2008-to.html">The
Automatic Earth, is openly cynical:
You know what they present as their main reason for
all this? The interest of the taxpayer!!
Yes, "you lied, straight-faced while I cried", to quote
Fannie’s great-aunt Maggie May.
In reality, the conditions have been created to slush untold billions
from the Treasury into the GSE’s, stealthily over time, and
from there directly to the Wall Street banks. That’s why
Fannie and Freddie were founded, and that’s why they continue
to exist. Government involvement in the housing market has one purpose,
and one only: to raise real estate prices, and thus mortgage payments.
Who profits? Well, not the buyers, obviously. Remember, this scheme was
set up 70 years ago. Americans have paid far too much for their homes,
in a scam initiated by their government, since 1938.
I think Ilargi is pretty knowledgeable, but may not be perceived widely
as an authority. Nouriel Roubini, on the other hand, is
internationally known. He predicted the implosion, two years
ago. And he thinks href="http://www.rgemonitor.com/roubini-monitor/253501/fannie-and-freddie%E2%80%99s-bust-and-deeply-flawed-government-bailout/">the
price tag is going to be big:
This plan does nothing to restore the long term
viability and efficiency of such institutions. It is just a very
expensive taxpayers’ funded bailout of the shareholders and
creditors of these institutions. Like the action taken in the Bear
Stearns case and other recent government interventions and bailouts of
private and quasi private financial institutions this is a form of
privatization of profits and socialization of losses; it is socialism
and corporate welfare for the rich, well connected and Wall Street.
From the normally measured href="http://www.housingwire.com/2008/09/07/history-fannie-freddie-seized-by-federal-government/">Paul
This is no longer the worst mortgage crisis since the Great Depression;
this is the worst mortgage crisis, period.
theory this is a bottomless sinkhole, especially in light of the fact
that systemic risk will be increasing over the next 16 months (and
probably beyond that).
morning equities are gonna fly, especially financials... for how long,
I can't even begin to predict. But one thing is for certain. The crash
is going to be spectacular.
Holders of stock in the two companies will lose money. Many
financial institutions hold that stock. The Treasury expects
that only one percent of thrifts will fail because of that.
But there are 1245 thrifts, so that would be 12 more
failures. I did not see an estimate of bank failures, only a
statement that banks that find themselves undercapilalized should call
their regulators. That could be dicey: the FDIC is, itself,
undercapitalized at the moment. If the FDIC has to turn to
the Treasury for help, it could mean that taxpayers will not only bail
out Fannie and Freddie, but some other institutions as well.
Just to put that into perspective: there are over 8000 banks.
If one percent fail, that would mean ~80 plus ~12 failed
depository institutions (=92) would need to be bailed out. If
the FDIC is undercapitalized because of 11 failures, it is difficult to
see how this could end well.
It will not necessarily be a catastrophe. After all, we
managed to endure the S&L crisis with "only" a two hundred
billion dollar hit to the taxpayers. But that did not occur
at the same time as all the other troubles in the financial systems of
Oh, and the best part? The Fannie-Freddie takeover is just a
Fannie-Freddie Move Is `Stopgap,' Leaving Fate to Next President.
In other news, The Scientist has an article entitled href="http://www.the-scientist.com/article/display/54983/">The
Future of U.S. Science Policy. They say:
With an administration change at hand, research could
come out of the shadows and into the political light.
Umm, neither candidate is so overtly anti-science as Bush, but either
would need to improve funding in order to have much of a positive
effect. At present, that it highly doubtful.
Even an overtly pro-science candidate would find their hands tied by budgetary limitations brought on by 8 years of GWB's economic mismanagement.
McCain may not be overtly anti-science, but Pailin is and how long will McCain be able to be president at 72 with a history of 4 cancer bouts? If I had to bet, I would say not long.
There's plenty of money for science, and possibly even the mortgage bailiout: close the bases, draw down the military till it's no bigger than is needed to effectively defend the soil of the USA. Given that neither Mexico nor Canada are geared up for invasion ...