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TEMA: The $5 trillion mess

Re:The $5 trillion mess prije 10 godine, 4 mjeseci #1417

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Freddie, Fannie Failure Could Be World Catastrophe, Yu Says

Aug. 22 (Bloomberg) -- A failure of U.S. mortgage finance companies Fannie Mae and Freddie Mac could be a catastrophe for the global financial system, said Yu Yongding, a former adviser to China's central bank.

``If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic,'' Yu said in e-mailed answers to questions yesterday. ``If it is not the end of the world, it is the end of the current international financial system.''

Freddie and Fannie shares touched 20-year lows yesterday on speculation that a government bailout will leave the stocks worthless. Treasury Secretary Henry Paulson won approval from the U.S. Congress last month to pump unlimited amounts of capital into the companies in an emergency.

China's $376 billion of long-term U.S. agency debt is mostly in Fannie and Freddie assets, according to James McCormack, head of Asian sovereign ratings at Fitch Ratings Ltd. in Hong Kong. The Chinese government probably holds the bulk of that amount, according to McCormack.

Industrial & Commercial Bank of China yesterday reported a $2.7 billion holding. Bank of China Ltd. may have $20 billion, according to CLSA Ltd., the Hong Kong-based investment banking arm of France's Credit Agricole SA. CLSA puts the exposure of the six biggest Chinese banks at $30 billion.

`Beyond Imagination'

``The seriousness of such failures could be beyond the stretch of people's imagination,'' said Yu, a professor at the Institute of World Economics & Politics at the Chinese Academy of Social Sciences in Beijing. He didn't explain why he held that view.

China's government hasn't commented on Fannie and Freddie.

Yu is ``influential'' among government officials and investors and has discussed economic issues with Premier Wen Jiabao this year, said Shen Minggao, a former Citigroup Inc. economist in Beijing, now an economist at business magazine Caijing.

Investor confidence in Fannie and Freddie has dwindled on speculation that government intervention is inevitable. Washington-based Fannie has fallen 88 percent this year, while Freddie of McLean, Virginia, has slumped 91 percent.

Paulson got the power to make purchases of the two companies' debt or equity in legislation enacted July 30 that was aimed at shoring up confidence in the businesses. He has said the Treasury doesn't expect to use that authority.

The two companies combined account for more than half of the $12 trillion U.S. mortgage market.

Re:The $5 trillion mess prije 10 godine, 4 mjeseci #1418

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Why The Fannie-Freddie Bailout Will Fail

08/09/08 "ICH" - -- With yesterday's announcement of the most massive federal bailout of all time, it's now official: Fannie Mae and Freddie Mac, the two largest mortgage lenders on Earth, are bankrupt.

Some Washington bigwigs and bureaucrats will inevitably try to spin it. They'll avoid the "b" word with vengeance. They'll push the "c" word (conservatorship) with passion. And in the newspeak of 21st century bailouts, they'll tell you "it all depends on what the definition of solvency is."

The truth: Without their accounting smoke and mirrors, Fannie and Freddie have no capital. The government is seizing control of their operations. Their chief executives are getting fired. Common shareholders will be virtually wiped out. Preferred shareholders will get pennies. If that's not wholesale bankruptcy, what is?

Some Wall Street pundits and pros will also try to twist the facts to their own liking. They'll treat the bailout like long-awaited manna from heaven. They'll declare that the "credit crisis is now behind us." They may even jump in to buy select financial stocks. And then they'll try to persuade you to do the same.

The reality: This was the same pitch we heard in August of last year when the world's central banks made a coordinated attempt to rescue credit markets with massive injections of fresh cash. It was also the same pitch we heard in March when the Fed bailed out Bear Stearns. But each time, the crisis got progressively worse. Each time, investors lost fortunes.

Together, both Washington and Wall Street are trying to persuade you that, "no matter what, the government will save us from financial disaster." But the real lessons already learned from these events are another matter entirely:

Lesson #1. Each successive round of the credit crisis is far deeper and broader than the previous.

* In 2007, the big news was big losses; in 2008, it's big bankruptcies.

* In March, the failure of Bear Stearns shattered $395 billion in assets. Now, just six months later, the failure of Fannie Mae and Freddie Mac is impacting $1.7 trillion in combined assets, or over four times more. And considering the $5.3 trillion in mortgages that Fannie-Freddie own or guarantee, the impact is actually thirteen times greater than the Bear Stearns failure.

Lesson #2. Despite unprecedented countermeasures, Washington has been unable to stem the tide.

Yes, the Fed can inject hundreds of billions into the banking system. But if banks don't lend, the money goes nowhere.

Sure, the Treasury can inject up to $200 billion of capital into Fannie and Freddie. But if their mortgage portfolio is full of holes, all that new capital goes down the drain.

And of course, the U.S. government has vast resources. But if the $49 trillion mountain of U.S. debts and the $180 trillion pile-up of U.S. derivatives are beginning to crumble, all those resources don't amount to more than a band-aid and a prayer.

Lesson #3. Shareholders are the first victims.

Bear Stearns shareholders got wiped out. Fannie and Freddie Mac shareholders are getting wiped out. Ditto for shareholders in any of Detroit's Big Three that go belly-up, any bank taken over by the FDIC or any insurer taken over by state insurance commissioners.

The Next Lesson:
The Primary Mission of the Fannie-Freddie
Bailout Will Ultimately End in Failure

Most people assume that when the government steps in, that's it. The story dies and investors shift their attention to other concerns. In smaller bailouts, perhaps. But not in this Mother of All Bailouts.

The taxpayer cost for just these two companies — up to $200 billion — is more than the total cost of bailing out thousands of S&Ls in the 1970s. But it's still just a fraction of the liability the government is now assuming.


First, because the number of home foreclosures and mortgage delinquencies has now surged to a shocking four million — and a substantial portion of the massive losses stemming from this calamity have yet to appear on Fannie's and Freddie's books.

Second, because the U.S. recession is still in an early stage, with surging unemployment just beginning to cause still another surge in foreclosures and mortgage delinquencies.

Third, even before Fannie and Freddie begin to feel the full brunt of the mortgage and recession calamity, their capital had already been grossly overstated.

Indeed, right at this moment, while Wall Street analysts are trying to evaluate the details of a bailout plan that's supposed to save them, regulators and their advisers are poring over the Freddie-Fannie accounting mess they're supposed to inherit. According to Gretchen Morgenson and Charles Duhigg's column in yesterday's New York Times, "Mortgage Giant Overstated the Size of Its Capital Base" ...

* Freddie Mac's portfolio contains many securities backed by subprime and Alt-A loans. But the company has not written down the value of many of those loans to reflect current market prices.

* For years, both Freddie and Fannie have effectively recognized losses whenever payments on a loan are 90 days past due. But in recent months, the companies saidthey would wait until payments were TWO YEARS late. As a result, tens of thousands of other loans have also not been marked down in value.

* Both companies have grossly inflated their capital by relying on accumulated tax credits that can supposedly be used to offset future profits. Fannie says it gets a $36 billion capital boost from tax credits, while Freddie claims a $28 billion benefit. But unless these companies can generate profits, which now seems highly unlikely, all of the tax credits are useless. Not one penny of these so-called "assets" could ever be sold. And every single penny will now vanish as the company goes into receivership.

In short, the federal government is buying a pig in a poke — a bottomless pit that will suck up many times more capital than they're revealing. My forecast:

Just to keep Fannie and Freddie solvent will take so much capital, there will be no funds available to pursue the primary mission of this bailout — to pump money into the mortgage market and save it from collapse. That mission will ultimately end in failure.

The Most Important Lesson of All:
As the U.S. Treasury Assumes
Responsibility for $5.3 Trillion in Mortgages,
It Places Its Own Borrowing Ability at Risk

The immediate reason the government decided not to wait any longer to bail out Freddie and Fannie was very simple: All over the world, investors were beginning to reject their bonds, refusing to lend them any more money. So the price of Fannie and Freddie bonds plunged, and the yields on those bonds went through the roof.

As a result, to borrow money, Fannie-Freddie had to pay higher and higher interest rates, far above the rates paid by the U.S. Treasury Department. And they had to pass those higher rates on to any homeowner taking out a new home loan, driving 30-year fixed-rate mortgages sharply higher as well.

Now, with the U.S. Treasury itself stepping in to directly guarantee Fannie-Freddie debts, Washington and Wall Street are hoping this rapidly deteriorating scenario will be reversed.

They hope investors will flock back to Fannie and Freddie bonds.

They hope investors will resume lending them money at a rate that's much closer to the Treasury rates.

And they hope Fannie and Freddie will again be able to feed that low-cost money into the mortgage market just like they used to.

In other words, they hope the U.S. Treasury will lift up the credit of Fannie and Freddie.

There's just one not-so-small hitch in this rosy scenario: Fannie's and Freddie's mortgage obligations are just as big as the total amount of Treasury debt outstanding.So rather than the Treasury lifting up Fannie and Freddie, what about a scenario in which Fannie and Freddie drag down the U.S. Treasury?

To understand the magnitude of this dilemma, just look at the numbers ...

* Mortgages owned or guaranteed by Fannie and Freddie: $5.3 trillion.

* Treasury securities outstanding as of March 31, according to the Fed's Flow of Funds (report page 87, pdf page 95): Also $5.3 trillion.

If Fannie's and Freddie's obligations were equivalent to 10% or even 20% of the U.S. Treasury debts, the idea that they could fit under the Treasury's "full faith and credit" umbrella might make sense. But that's not the situation we have here — Fannie's and Freddie's obligations are the equivalent of 100% of the Treasury's debts.

And it's actually worse than that:

* Foreign investors, the most likely to dump their holdings if they lose confidence in the United States, hold an estimated 20% of the Fannie- and Freddie-backed mortgages outstanding. But ...

* Foreign investors own 52.7% of the Treasury securities outstanding (excluding those held by the Fed).

So based on the above stats, Treasury securities are actually more vulnerable to foreign selling than Fannie and Freddie bonds.

What happens if the international mistrust and fear afflicting Fannie and Freddie bonds infects U.S. Treasury bonds? Foreign investors would start dumping Treasury securities en masse. They'd drive Treasury rates sharply higher. And they'd wind up forcing Fannie and Freddie to pay much higher rates for their borrowings after all.

How will you know? Just watch the all-critical spread (difference) between the yield on Fannie-Freddie bonds, considered lower quality, and the yield on equivalent government bonds, considered high quality. Then consider these two possibilities:

* If that spread narrows mostly because Fannie and Freddie interest rates are coming down toward the level of the Treasury rates, fine. That means the immediate goal of the bailout is being achieved. BUT ...

* If the spread narrows mostly because Treasury rates are going up toward the level of Fannie's and Freddie's rates, that's not so fine. It not only means a failure to achieve the immediate goals, but it will also imply that the entire Fannie-Freddie bailout is backfiring on the Treasury.

A Fictional Scenario
That's Coming True

In my book, Investing Without Fear: Protect Your Wealth in All Markets and Transform Crash Losses Into Crash Profits, I anticipated this very scenario. In a fictional scenario about the not-too-distant future, I warned what might happen if the U.S. Treasury tried to bail out the bonds of a giant corporation, just as it's doing for Freddie and Fannie right now.

In my scenario, a few days after the bailout is announced, the Treasury secretary calls the president of the United States on the phone to bring him up to date with the impact in the financial markets. Here's the dialog that follows, quoted from my book verbatim [with any additions in brackets]:

"It's no good. The benefit of our plan to the stock market is a spit in the ocean. On the other hand, to the government bond market, it's a potential hydrogen bomb. The quality spreads are narrowing — and in the wrong direction."

The president didn't know much about quality spreads. "What are the causes and what are the consequences of changes in quality spreads?" he asked.

"I am referring to the difference in yield between a Treasury bond and a corporate bond. A big corporation [like Fannie or Freddie] always has to pay more than the U.S. Treasury to borrow money. Typically, the difference has been about one full percentage point.

"Then, several months ago, when the full threat of corporate bankruptcies was first apparent, the yield on medium-grade corporate bonds went up by 2 1/4 percent, but the yield on the governments went up only 1/4 percent. In other words, the spread increased by two full percentage points. It was a red-hot flashing signal of trouble. It revealed that confidence in all corporations — no matter how creditworthy — had collapsed. But that was before our rescue package was announced."

"And now?"

"Now the opposite is happening. Corporate bond yields [like Fannie's and Freddie's] are back down sharply, but government bond yields are actually up sharply. The spread between them has narrowed to practically nothing — a very bad sign." The Treasury secretary felt satisfied that he had put forth a very clear and straightforward explanation.

"Well, isn't that what we had said we wanted — to bring up the corporate bond market, to get it back up toward the level of government bonds?"

The secretary shook his head, trying to hold his voice steady so that his feelings of frustration with the president's lack of knowledge of bond markets would not be picked up over the phone. In the past, he tried several times to explain to the president how interest rates and prices moving in opposite directions always meant the same thing, but that spreads, although moving in the same direction, could mean a variety of different things.

How does one make such things simple for a president to understand without sounding condescending? The secretary certainly didn't know how. He spent the next half hour going over the events in the marketplace until finally, after considerable effort, the president developed an image of bond markets that looked similar to the chart below.
Bond Rescue

"Now I see," the president said finally. "We wanted to bring the corporate bonds up to the level of the government bonds. What's happening is precisely the opposite. The 'governments,' as you call them, are falling down to the level of the 'corporates.' In short, we are not lifting them up; they are dragging us down."

"Yes, Mr. President. We bent over, we bent all the way over, to pull them out of the quicksand. Instead, they pulled us down with them, and now we're sinking in the quicksand too."

The president thought for a moment before he spoke. "The question is, Why? Don't they believe we're serious? Why haven't we restored confidence? At the meeting, it was said that we can create cash, that the law gives us the authority to funnel this cash wherever we please."

"The answer is that we can create cash. But we cannot create credit."

"What's the difference?" the president queried.

"There's a very big difference. To create more cash, all we have to do is speed up the printing presses at the mint — or, actually, pump it in electronically. And when we dish it out, no one is going to turn us down. But to create credit, we have to convince investors and bankers to make loans — and in this environment of falling confidence, I can assure you that this isn't easy. If it were so easy, we could have saved Bethlehem Steel or Enron or Kmart or Global Crossing or WorldCom or any of the other giants that have failed. But we didn't, and for good reason."

The president was getting impatient. "So what's the point?"

"The point is that you can create cash; you can't create confidence."

"It would seem to me that the more money we give 'em, the more confidence they'd have."

"No, no! It's exactly the opposite. The more we spend the government's money recklessly, the less confidence they have and the more they fear our government bonds will go down in value."

"Oh? But why can't we just buy more corporate bonds? That should convince them we mean business!"

"No, it just convinces them we're throwing more good money after bad — their good money after bad."

"But what about the new law?"

"The law gives us the on-paper authority to buy private securities. It does not give us the actual power to create real economic wealth."

"Why didn't we recognize this when we discussed the rescue plan?"

"We did. But you overrode us, and we consented. We hoped that the marketplace might swallow it. We seriously underestimated the sophistication of U.S. and foreign investors — very seriously underestimated."

Still the president sounded perplexed. "You're saying the market is sensitive. You're saying the market is smart. I see that now. But ..."

The secretary's irritability was becoming more apparent. "Let's say I'm a foreign investor and I own U.S. Treasury bonds. This implies that I trust the U.S. government; that I loaned you my money for the purpose of running your government. Now you take my money and pass it on to a third party, a private company. So I say to you, 'What did you go and do that for? If I wanted to loan the money to that company, I would have done so myself — directly — in the first place. But I didn't. I didn't do it because I don't trust the company. I trusted you. But now I can't trust you anymore either. Now you're just one of them.' So the investor stops buying our bonds or, worse, dumps the government bonds he's holding, and then we are in trouble. Then we can't sell our government bonds anymore to pay off the old ones coming due. Then we, the United States government, default."

The president hesitated for a few seconds before responding, but it seemed like hours as the tension built.

"Then what?"

The secretary could not believe his ears. The president of the United States had treated the government's default with levity, utter levity. He could no longer control his boiling frustration — and fear. "Do you want to allow the entire market for U.S. government securities to shut down? Do you want to be the one who has to lay off hundreds of thousands of government employees because you can't raise the money to meet the government payroll? Do you want to be the last president of the United States? Do you want to risk a new republic with a new constitution? Do you want to destroy, in one fell swoop ..."

The secretary's voice broke with emotion. Silence reigned.

"[Hank], I appreciate the sincerity of your emotions, but you misunderstood me. What I said, in fact, was 'then WHAT,' indicating to you my surprise and disbelief that our country could ever reach the point you've described so dramatically just now."

Re:The $5 trillion mess prije 10 godine, 4 mjeseci #1419

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The Shocking Truth: China and American Debt

Reuters, Monday September 8 2008

BEIJING, Sept 8 (Reuters) - The U.S. Treasury's takeover of Fannie Mae and Freddie Mac is good news in the short term for China, the biggest holder of the giant mortgage lenders' debt, but Beijing's huge U.S. exposure still poses a serious risk, a prominent government researcher said on Monday.
China owned $376 billion of debt issued by U.S. government agencies, principally Fannie and Freddie, as of mid-2007.
The seizure of the two firms, prompted by worries over their shrinking capital, was the latest in a series of emergency steps taken by U.S. authorities to quell a year-long credit crisis that has helped push many economies toward recession. [ID:nN07479172]
"China has bought a lot of asset-backed securities, and there might be short-term improvement in price," said He Fan, an economist with the Chinese Academy of Social Sciences.
But, taking a longer view, he said the bailout posed a problem: if the Treasury issues new debt to fund the rescue, should China be a buyer or not?
"For China, whether or not you buy the new treasuries, there will be losses: if you buy them, you're getting deeper in the hole; if you don't buy, your existing holdings will lose value," He said.
The Treasury's equity stake could reach $100 billion in each of the lenders, which own or guarantee almost half of America's $12 trillion in home loans, but it said the ultimate cost of the rescue plan depends on how well the companies perform.
He said the takeover was the last resort for the U.S. government, underlining that the credit crunch was far from over.
"This shows that the risks involved are greater than we thought. As such, Chinese banks should be cautious and prudent," the researcher added.
Bank of China said on Aug. 29 it had slashed its exposure to Fannie and Freddie to $12.67 billion as of Aug. 25 from $17.3 billion at the end of June.
Vice-Premier Wang Qishan, who is in overall charge of economic and financial policies, did not comment directly on the two agencies' woes. But, speaking in the southern city of Xiamen, he said the credit crisis was having "quite a serious impact".
Although the takeover of the mortgage lenders was a reminder of the investment risks China is taking, He said the country had little room to diversify its $1.8 trillion in currency reserves.
Buying non-government dollar bonds would be even riskier, while the euro is expensive and yields in Japan are low.
"If we don't buy U.S. treasuries and ABS, what else we can buy?" He said. "China just has no way to avoid the risks. Whatever we do, we have to bear the losses."
There was a vigorous reaction among Chinese Internet users.
A blogger on said "a capitalist country is now acting to save the market and protect investors", whereas China's government had sat idly by during a 64 percent plunge in the Shanghai stock market since last October.
"How can Chinese stock investors not be sad? How can they not lose confidence?" the post said.
The main Shanghai index <.SSEC> shed 2 percent on Monday, touching a fresh 20-month low, despite a rally elsewhere in Asia triggered by the takeover of the two firms.
"Hope that China's stock market will get government help like Fannie Mae and Freddie Mac, not just lip service," a blogger named "Bang Ni" on said. (Reporting by Zhou Xin, Langi Chiang and Eadie Chen; Writing by Alan Wheatley)

Re:The $5 trillion mess prije 10 godine, 4 mjeseci #1420

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Fannie Mae posts record $29 billion loss

Reuters, Mon Nov 10, 2008

NEW YORK (Reuters) - Fannie Mae said on Monday it is losing money so fast it may have to tap the government for cash to avoid shutting down after the largest source of funding for U.S. homes reported a record $29 billion loss.

The company, which along with rival Freddie Mac owns or guarantees about half of U.S. mortgages, reported its fifth consecutive quarterly loss. The government forced the two companies into conservatorship in September.

Fannie Mae warned that the worst housing crisis since the Great Depression could wipe out its net worth by the end of the year, forcing it to obtain funding from the U.S. Treasury in order to avoid the government putting it into receivership and closing its operations.

The company's loss stemmed largely from the write down of the value of deferred tax breaks, which amounts to an admission it will continue to report losses.

Deferred tax assets can be used to offset future taxes, but only if the company can show it will return to profitability.

Credit expenses also soared to $9.2 billion in the quarter due to deteriorating mortgage credit conditions and as home prices declined, the company said in a statement.

Fannie Mae's loss equaled $13 per share, compared with a loss of $1.4 billion, or $1.56 per share a year earlier. The company warned of a big loss for the fourth quarter if downward trends in U.S. housing and financial markets continue.

Further losses this quarter may wipe out shareholder equity, which fell to $9.3 billion in the third quarter from $44 billion at the end of 2007.

Negative shareholder equity would require the company to obtain billions of dollars of capital from the U.S. Treasury to help the company maintain operations that support the bulk of U.S. mortgages.

The Treasury has already injected cash into other financial institutions, and on Monday boosted a bailout for American International Group Inc (AIG.N: Quote, Profile, Research, Stock Buzz) as the giant insurer reported a record $24.47 billion loss.

"It's a glaring symptom of what we face in the financial markets," said Andrew Harding, head of taxable bonds at Allegiant Asset Management in Cleveland, Ohio. "The Treasury has to finance this."

However, accepting capital from Treasury under current terms could raise costs and make it harder for Fannie Mae to return to profitability, the company said in a filing with the Securities and Exchange Commission.

Equity investors, while nearly wiped out under the conservatorship, have been eager to see if the regulator will instruct the companies to sacrifice profit for bigger volumes in their mortgage guarantee and investment businesses. Both have been given the room to expand portfolios by a combined $200 billion through 2009, but they have been slow to follow through as their funding costs have risen.

On top of restrictive debt costs, Fannie Mae said that it cannot issue securities in excess of 110 percent of its total indebtedness as of June 30, based on the Treasury's senior preferred stock purchase plan negotiated in September.

That "likely will prohibit us from increasing the size of our mortgage portfolio to $850 billion, unless Treasury elects to amend or waive this limitation," Fannie Mae said in its filing. The portfolio was $761 billion in September.

Shares of Fannie Mae were little changed near 74 cents at mid-morning in New York. Yield spread premiums on Fannie Mae five-year notes used to fund portfolio growth narrowed about 0.05 percentage point to 1.115 percentage point.

"They have to tap into Treasury funding," Harding said. "Fannie Mae is mandated to buy mortgage-backed securities. How are they going to do that if they have a negative net worth?

Re:The $5 trillion mess prije 10 godine, 4 mjeseci #1421

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Freddie Mac Wants $35B More, Fannie Mae To Follow

Jan. 24 (Bloomberg) -- Freddie Mac, the mortgage-finance company under federal control, needs as much as $35 billion more in federal aid, and Fannie Mae may soon ask the U.S. Treasury Department for rescue funds as well.

Freddie, which took $13.8 billion from Treasury in November, said in a securities filing yesterday that its fourth- quarter operating losses will again drive its net worth below zero. The McLean, Virginia-based company also said it settled a dispute over Washington Mutual loans with JPMorgan Chase & Co.

The request for funds comes as the Treasury faces increasing demands from U.S. financial companies, including Bank of America and Citigroup Inc., that are coping with the fallout from a slumping housing market and a deep recession that’s driving foreclosures to record levels. Treasury officials pledged in September as much as $100 billion to Fannie and Freddie each to ensure their solvency.

“Their losses are going to be much higher than anyone anticipated,” said Paul Miller, an analyst with FBR Capital Markets in Arlington, Virginia. “The more and more that people are digging into these portfolios, they’re finding out the more and more these guys were doing subprime and Alt-A loans and classifying them as prime.” Alt-A loans were made to borrowers with little or no income verification or to those with credit scores slightly above subprime.

Freddie and Washington-based Fannie are the largest sources of mortgage money in the U.S., owning or guaranteeing a combined $5.2 trillion of the $12 trillion home-loan market.

The companies have posted five consecutive quarters of losses totaling $68.4 billion combined. The Federal Housing Finance Administration seized their operations in September amid concern from regulators that the government-sponsored enterprises may fail in the worst housing slump since the Great Depression.

Fannie’s Plans

Fannie, which hasn’t yet drawn on the Treasury backup funds, said in November that it may do so after it reports fourth-quarter results next month. Fannie also said at that time that $100 billion may not be enough to keep it afloat. Treasury agreed to pump money into the companies if the value of their assets drops below what they owe on their obligations.

“Given that they have $4.5 trillion of risk out there, $100 billion is a drop in the bucket,” Miller said. “Given the fact that their risk profile on these loans is greater than they led everyone to believe, greater than $100 billion in losses on each institution would not surprise me.”

Stefanie Mullin, a Federal Housing Finance Agency spokeswoman, declined to comment.

FHFA Director James Lockhart, who regulates the companies, said in an interview this week that one or both companies may request federal aid after they report fourth-quarter earnings next month.

Reporting in February

“They will be reporting numbers in mid-to-late February and, yes, I think everybody would expect that there would be a draw on Treasury,” Lockhart said.

Spokesmen Brian Faith at Fannie, Sharon McHale at Freddie and Thomas Kelly at JPMorgan declined to comment.

Freddie’s settlement with JPMorgan, which took over WaMu’s assets after the thrift collapsed in September, will allow the New York-based bank to retain WaMu’s mortgage-servicing contracts, according to the filing.

‘One-Time’ Payment

In exchange, JPMorgan will assume WaMu’s obligations to repurchase any bad home loans that the thrift sold to Freddie with “recourse.” JPMorgan will make a “one-time” payment to cover other loans that WaMu would have been required to buy back because the mortgages failed to meet promises made to Freddie about their quality, according to the filing.

The filing didn’t specify how much JPMorgan is paying Freddie.

Re:The $5 trillion mess prije 10 godine, 4 mjeseci #1422

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Freddie Mac Lost $265 Million Every Day

Mar 12, 2009, Yahoo Finance

Freddie Mac reported yesterday that its liabilities now exceed its assets, in part because the fair value of its loan portfolio declined by a massive $120 billion. It has said it will need to draw another $30.8 on the loan facility established to keep it afloat. All told it lost just a smidge under $24 billion in the fourth quarter.

Those a mind-boggling numbers. Regular readers know we have a special way of breaking these down to more comprehensible numbers.

Freddie Mac Losses By The Calendar

Full Quarter: $24. billion
Each Day: $265 million
Each Hour: $11 million
Each Minute: $184,000
Each Second: $3000

Each and every day in the last quarter of 2008--including weekends Thanksgiving and Christmas--Freddie Mac lost $265 million. That beats out General Motors, which lost just $85 million a day. It means that every second, Freddie Mac lost more than two weeks worth of the average American's income. Every 90 seconds, Freddie Mac lost as much as the average home price in the most expensive region in the country.

The main skill required to run Freddie Mac seems to be the ability to light three one thousand dollar bills on fire every second of every day. If these guys keep it up, they may even be able to get a job at AIG one day.
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