from www.reuters.com
Bailout shows waning of U.S. financial power: James Saft
Wed Sep 10, 2008 7:23am EDT
-- James Saft is a Reuters columnist. The opinions expressed are his own --
By James Saft
LONDON (Reuters) - American financial hegemony -- the United States' ability to borrow at attractive rates despite its spiraling debts -- ain't what it used to be.
When he introduced the first bailout of Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) back in July Hank Paulson thought his pledge of government support, if needed, would be enough to ease investor pressure on the now-nationalized lenders.
"If you have a bazooka in your pocket and people know it, you probably won't have to use it," the U.S. Treasury Secretary told a Senate Banking Committee hearing on July 15.
Time was, that would be enough for America's global creditors.
But Paulson's pledge turned out to have more in common with Chekhov's gun, which the writer said once introduced into a story must inevitably be fired.
Despite the extraordinary reassurances, foreign investors in Fannie Mae and Freddie Mac debt staged an effective buyers' strike, forcing the mortgage giants to pay a crippling premium of around one percentage point over Treasuries to borrow.
With money that expensive the two lenders, or at least one of them, would have grave trouble earning enough money to dig themselves out of their hole and make good their guarantees on trillions of dollars worth of mortgages, many of which are now likely to default.
Think about it: the U.S. Secretary of the Treasury effectively said he'd sort it out if it went bad and the world said that wasn't good enough. The move to take the two into conservatorship is really an earth shaking event.
"I suspect this is the first case where foreign central banks exercised their leverage as creditors to push the U.S. government to make a policy decision that protected their interests," economist Brad Setser, who follows central banks at the Council on Foreign Relations, wrote in his blog. blogs.cfr.org/setser/
The plan could at a stroke unblock some of the clogged arteries of finance, allowing homeowners to borrow more cheaply and taking away at least one of the forces driving house prices downward. It also throws up huge questions about how the United States will finance its housing after the current cooling down period ends, which may, by the way, be sooner than many would like.
But the bailout may yet acquire even greater significance by marking a turning point in the nation's relationship with its creditors.
America is a debtor nation, with a huge current account deficit and insufficient savings.
The dollar actually rallied on the news, an extremely encouraging sign, but it has to be noted that at the time of writing 10-year treasury yields were about 25 basis points higher than they were before news of the conservatorship emerged on Friday. That is likely to be partly position covering by investors who were long Treasuries and short Fannie and Freddie debt, but it also must reflect in part concern over the ultimate cost of the bailout and the inflationary impact of potentially issuing huge amounts of debt to fund it.
WHY NOW, WHERE NEXT?
One argument advanced for why the government decided to step in now was that a recent review of Fannie's and Freddie's books had revealed capital issues.
While I have great respect for the ability of Morgan Stanley bankers, who combed through the mortgage lenders' entrails, I doubt that they've found much that was not known before by regulator James Lockhart and his team.
The two big changes that have happened since July are the continued negative news on housing, with something like 9 percent of American mortgages now in arrears or in foreclosure, and the simple unwillingness of investors to extend Fannie and Freddie cheap credit.
That should get better now, especially given government plans to buy mortgage securities directly, and mortgage rates will be headed lower for those able to get one. Freddie Mac sold three-month bills on Monday at a yield 46 basis points lower than a sale six days before and Fannie and Freddie debt risk premiums fell across the board.
But note that mortgage securities issued by Ginnie Mae, which have an explicit government guarantee, were before the news trading only about 25 basis points lower than Fannie and Freddie mortgage-backed securities. That may imply limited appetite for U.S. mortgage paper under any circumstances.
The big question, the solution of which will be politically determined, is what form Fannie and Freddie take in the future and what arises to replace part or all of them.
Under the terms of the plan, the two will expand their purchases of mortgages through the end of next year, but then begin scaling back. Paulson left open the possibility that the government guarantee is removed.
I cannot see that happening. Home prices will still fall from here and at the point at which the next President and Congress are deciding whether or not to de-nationalize the mortgage market, housing and the economy will still be in the dumps.
The United States is likely to have a government-guaranteed mortgage market for a very long time, but I question how long the rest of the world will be willing to play along.
-- At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund --
(Editing by Ruth Pitchford)
© Thomson Reuters 2008. All rights reserved. Users may download and print extracts of content from this website for their own personal and non-commercial use only. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters. Thomson Reuters and its logo are registered trademarks or trademarks of the Thomson Reuters group of companies around the world.
Thomson Reuters journalists are subject to an Editorial Handbook which requires fair presentation and disclosure of relevant interests.
I posted previously stating that the CBO estimate bailout cost to the taxpayer of 25Billion was too low and 250 Billion was more likely the right number.... Well here we are. My only hope is that 250 is upper bound not the lower...
Showing posts with label Fannie. Show all posts
Showing posts with label Fannie. Show all posts
Wednesday, September 10, 2008
Tuesday, July 22, 2008
F&F Mess: Cost of Bailout
from www.nytimes.com
July 23, 2008
Cost of Loan Bailout, if Needed, Could Be $25 Billion
By DAVID M. HERSZENHORN
WASHINGTON — The proposed government rescue of the nation’s two mortgage finance giants will appear on the federal budget as a $25 billion cost to taxpayers, the independent Congressional Budget Office said on Tuesday even though officials conceded that there was no way of really knowing what, if anything, a bailout would cost.
The budget office said there was a better than even chance that the rescue package would not be needed before the end of 2009 and would not cost taxpayers any money. But the office also estimated a 5 percent chance that the mortgage companies, Fannie Mae and Freddie Mac, could lose $100 billion, which would cost taxpayers far more than $25 billion.
The House is expected to act this week on housing legislation that includes the proposed rescue plan. Legislative language has not been finalized, but the Congressional Budget Office said its estimates were based on the plan by the Treasury Department and that it did not expect significant changes in the final bill.
According to the estimate, which was delivered in the form of a letter to the House Budget Committee chairman, Representative John M. Spratt Jr., Democrat of South Carolina, the director of the budget office, Peter R. Orszag, predicted that “a significant chance, probably better than 50 percent, that the proposed new Treasury authority would not be used before it expired at the end of December 2009.”
Mr. Orszag, at a briefing with reporters, acknowledged that pinpointing the eventual cost of the package was impossible. “There is very significant uncertainty involved here,” he said.
The uncertainty runs in both directions, with some government officials and market analysts suggesting that Fannie Mae and Freddie Mac are fundamentally sound and will perform well over the long-term. Others, including some private equity managers, are pessimistic and predict heavy losses.
The rescue plan, put forward last week by the Treasury secretary, Henry M. Paulson Jr., would allow the Treasury Department to spend hundreds of billions of dollars to shore up the mortgage companies should they be at risk of collapse, either by extending credit or by purchasing equity in the companies, which are publicly traded.
Mr. Orszag said that the analysis by his office did not distinguish between the different forms of aid that might be offered — a credit line or a stock purchase — and that the analysis showed no short-term potential financial benefit for taxpayers even if Fannie Mae and Freddie Mac perform well.
But he said the analysis found substantial risk for taxpayers if the companies had steep losses and would not say if his office had analyzed the implications of a full government takeover of the companies.
How much the government will end up spending on a rescue, if one is needed, would depend on many factors, he said, including sentiment on Wall Street. “A key question becomes how does the market view the entities?” he said.
Fannie Mae and Freddie Mac are commonly referred to as government-sponsored entities, because of the long implicit guarantee that the federal government would step in to save them if they were ever in danger of collapse.
One thing that is certain as a result of the rescue proposal is that the guarantee of government aid is now much more explicit, and Mr. Orszag said that the government’s assurance that it would not let the companies fail would have to be included in any analysis of their long-term financial prospects.
Most immediately, the $25 billion cost estimate provides a precise amount that Congress will have to offset with spending cuts or tax increases if lawmakers intend to comply with “pay as you go” budget rules in the House. Lawmakers could also decide that the $25 billion should be viewed as emergency spending and simply added to the national debt.
There was little immediate reaction to the projections on Capitol Hill as lawmakers and staff members reviewed the complicated calculations and the various assumptions they were based on.
Mr. Spratt, the chairman of the Budget Committee, issued a statement praising the Congressional Budget Office for moving quickly to produce its analysis. “Estimating the fiscal impact of this proposal is complex and involves considerable uncertainty,” Mr. Spratt said. “And not everyone will necessarily agree with every aspect of C.B.O.’s analysis.”
But he added: “C.B.O. is performing its important institutional role by providing in a timely manner its best professional and independent assessment.”
The analysis by the Congressional Budget Office also offered a sobering assessment of the mortgage giants based on several different metrics.
Under generally accepted accounting principles, Mr. Orszag said that the net worth of the mortgage giants at the end of the first quarter of 2008 was about $55 billion. He also said that the companies held more than $80 billion in capital at the end of March and for regulatory purposes were considered to be "adequately capitalized" by the Department of Housing and Urban Development.
But on a fair value basis, the value of the mortgage companies’ assets exceeded their liabilities at the end of March by just $7 billion, a thin cushion considering liabilities at the time of $1.6 trillion, and an indication of why there have been numerous calls for the companies to raise additional capital. Mr. Orszag also noted that on July 11, before the Bush administration proposed its rescue plan, the total value of shares in Fannie Mae and Freddie Mac had fallen to a low of $11 billion. Shares in the companies are now worth about $20 billion.
The House is expected to vote on the larger package of housing legislation, including the rescue plan for the mortgage companies, as early as Wednesday, and the Senate is expected to quickly follow and send the bill to President Bush.
Among the issues that lawmakers have been debating is whether to exempt from the federal debt limit any expenditure that the Treasury Department makes on behalf of the mortgage companies. The current debt limit is $9.815 trillion and outstanding federal debt is roughly $9.5 trillion, leaving a cushion of $310 billion.
Congressional Democrats have expressed opposition to exempting the rescue plan from the debt limit, saying administration officials should come back to Congress for emergency authorization if additional spending is needed. Officials said it was probable that a compromise would be reached and the debt limit would still apply.
The housing legislation also includes the creation of a regulator for the mortgage companies, an agency apart from the Department of Housing and Urban Development, which oversees the mortgage giants.
Some critics have questioned whether the new regulator would have sufficient authority to swiftly increase capital requirements — the amount of cash that the mortgage companies need to maintain to protect against losses.
In his letter to Mr. Spratt, Mr. Orszag suggested that simply enacting the proposed rescue plan could bolster the confidence of Wall Street in Fannie Mae and Freddie Mac.
“Private markets might be sufficiently reassured to provide the GSE’s with adequate capital to continue operations without any infusion of funds from the Treasury,” he wrote. “during that time, it is possible that expectations about the duration and depth of the housing market downturn may brighten.”
But Mr. Orszag said his office had also consulted with market investors with a different outlook. “Many analysis and traders believe there is a significant likelihood that conditions in the housing and financial markets could deteriorate more than already reflected on the GSEs’ balance sheets,” he wrote, “and such continuing problems would increase the probability that this new authority would have to be used.”
Taking into account all of the different possibilities and sentiments, and measuring them against the budget “scorekeeping” rules, Mr. Orszag said his office had concluded “that the expected value of the federal budgetary cost from enacting this proposal would be $25 billion over fiscal years 2009 and 2010.”
25 bil huh? Try 10x that number....
July 23, 2008
Cost of Loan Bailout, if Needed, Could Be $25 Billion
By DAVID M. HERSZENHORN
WASHINGTON — The proposed government rescue of the nation’s two mortgage finance giants will appear on the federal budget as a $25 billion cost to taxpayers, the independent Congressional Budget Office said on Tuesday even though officials conceded that there was no way of really knowing what, if anything, a bailout would cost.
The budget office said there was a better than even chance that the rescue package would not be needed before the end of 2009 and would not cost taxpayers any money. But the office also estimated a 5 percent chance that the mortgage companies, Fannie Mae and Freddie Mac, could lose $100 billion, which would cost taxpayers far more than $25 billion.
The House is expected to act this week on housing legislation that includes the proposed rescue plan. Legislative language has not been finalized, but the Congressional Budget Office said its estimates were based on the plan by the Treasury Department and that it did not expect significant changes in the final bill.
According to the estimate, which was delivered in the form of a letter to the House Budget Committee chairman, Representative John M. Spratt Jr., Democrat of South Carolina, the director of the budget office, Peter R. Orszag, predicted that “a significant chance, probably better than 50 percent, that the proposed new Treasury authority would not be used before it expired at the end of December 2009.”
Mr. Orszag, at a briefing with reporters, acknowledged that pinpointing the eventual cost of the package was impossible. “There is very significant uncertainty involved here,” he said.
The uncertainty runs in both directions, with some government officials and market analysts suggesting that Fannie Mae and Freddie Mac are fundamentally sound and will perform well over the long-term. Others, including some private equity managers, are pessimistic and predict heavy losses.
The rescue plan, put forward last week by the Treasury secretary, Henry M. Paulson Jr., would allow the Treasury Department to spend hundreds of billions of dollars to shore up the mortgage companies should they be at risk of collapse, either by extending credit or by purchasing equity in the companies, which are publicly traded.
Mr. Orszag said that the analysis by his office did not distinguish between the different forms of aid that might be offered — a credit line or a stock purchase — and that the analysis showed no short-term potential financial benefit for taxpayers even if Fannie Mae and Freddie Mac perform well.
But he said the analysis found substantial risk for taxpayers if the companies had steep losses and would not say if his office had analyzed the implications of a full government takeover of the companies.
How much the government will end up spending on a rescue, if one is needed, would depend on many factors, he said, including sentiment on Wall Street. “A key question becomes how does the market view the entities?” he said.
Fannie Mae and Freddie Mac are commonly referred to as government-sponsored entities, because of the long implicit guarantee that the federal government would step in to save them if they were ever in danger of collapse.
One thing that is certain as a result of the rescue proposal is that the guarantee of government aid is now much more explicit, and Mr. Orszag said that the government’s assurance that it would not let the companies fail would have to be included in any analysis of their long-term financial prospects.
Most immediately, the $25 billion cost estimate provides a precise amount that Congress will have to offset with spending cuts or tax increases if lawmakers intend to comply with “pay as you go” budget rules in the House. Lawmakers could also decide that the $25 billion should be viewed as emergency spending and simply added to the national debt.
There was little immediate reaction to the projections on Capitol Hill as lawmakers and staff members reviewed the complicated calculations and the various assumptions they were based on.
Mr. Spratt, the chairman of the Budget Committee, issued a statement praising the Congressional Budget Office for moving quickly to produce its analysis. “Estimating the fiscal impact of this proposal is complex and involves considerable uncertainty,” Mr. Spratt said. “And not everyone will necessarily agree with every aspect of C.B.O.’s analysis.”
But he added: “C.B.O. is performing its important institutional role by providing in a timely manner its best professional and independent assessment.”
The analysis by the Congressional Budget Office also offered a sobering assessment of the mortgage giants based on several different metrics.
Under generally accepted accounting principles, Mr. Orszag said that the net worth of the mortgage giants at the end of the first quarter of 2008 was about $55 billion. He also said that the companies held more than $80 billion in capital at the end of March and for regulatory purposes were considered to be "adequately capitalized" by the Department of Housing and Urban Development.
But on a fair value basis, the value of the mortgage companies’ assets exceeded their liabilities at the end of March by just $7 billion, a thin cushion considering liabilities at the time of $1.6 trillion, and an indication of why there have been numerous calls for the companies to raise additional capital. Mr. Orszag also noted that on July 11, before the Bush administration proposed its rescue plan, the total value of shares in Fannie Mae and Freddie Mac had fallen to a low of $11 billion. Shares in the companies are now worth about $20 billion.
The House is expected to vote on the larger package of housing legislation, including the rescue plan for the mortgage companies, as early as Wednesday, and the Senate is expected to quickly follow and send the bill to President Bush.
Among the issues that lawmakers have been debating is whether to exempt from the federal debt limit any expenditure that the Treasury Department makes on behalf of the mortgage companies. The current debt limit is $9.815 trillion and outstanding federal debt is roughly $9.5 trillion, leaving a cushion of $310 billion.
Congressional Democrats have expressed opposition to exempting the rescue plan from the debt limit, saying administration officials should come back to Congress for emergency authorization if additional spending is needed. Officials said it was probable that a compromise would be reached and the debt limit would still apply.
The housing legislation also includes the creation of a regulator for the mortgage companies, an agency apart from the Department of Housing and Urban Development, which oversees the mortgage giants.
Some critics have questioned whether the new regulator would have sufficient authority to swiftly increase capital requirements — the amount of cash that the mortgage companies need to maintain to protect against losses.
In his letter to Mr. Spratt, Mr. Orszag suggested that simply enacting the proposed rescue plan could bolster the confidence of Wall Street in Fannie Mae and Freddie Mac.
“Private markets might be sufficiently reassured to provide the GSE’s with adequate capital to continue operations without any infusion of funds from the Treasury,” he wrote. “during that time, it is possible that expectations about the duration and depth of the housing market downturn may brighten.”
But Mr. Orszag said his office had also consulted with market investors with a different outlook. “Many analysis and traders believe there is a significant likelihood that conditions in the housing and financial markets could deteriorate more than already reflected on the GSEs’ balance sheets,” he wrote, “and such continuing problems would increase the probability that this new authority would have to be used.”
Taking into account all of the different possibilities and sentiments, and measuring them against the budget “scorekeeping” rules, Mr. Orszag said his office had concluded “that the expected value of the federal budgetary cost from enacting this proposal would be $25 billion over fiscal years 2009 and 2010.”
25 bil huh? Try 10x that number....
Subscribe to:
Posts (Atom)