NYTimes: Freddie, Fannie shareholders to be wiped out

[Joanne98]

U.S. Rescue Seen at Hand for 2 Mortgage Giants

By Stephen Labaton and Andrew Ross Sorkin
The New York Times
Saturday, September 6, 2008

http://www.nytimes.com/2008/09/06/business/06fannie.html?_r=1&hp&o

WASHINGTON -- Senior officials from the Bush administration and the Federal Reserve on Friday informed top executives of Fannie Mae and Freddie Mac, the mortgage finance giants, that the government was preparing to seize the two companies and place them in a conservatorship, officials and company executives briefed on the discussions said.

The plan, effectively a government bailout, was outlined in separate meetings that the chief executives were summoned to attend on Friday at the office of the companies' new regulator. The executives were told that, under the plan, they and their boards would be replaced, shareholders would be virtually wiped out, but the companies would be able to continue functioning with the government generally standing behind their debt, people briefed on the discussions said.

It is not possible to calculate the cost of any government bailout, but the huge potential liabilities of the companies could cost taxpayers tens of billions of dollars and make any rescue among the largest in the nation's history.

The drastic effort follows the bailout this year of Bear Stearns, the investment bank, as government officials continue to grapple with how to stem the credit crisis and housing crisis that have hobbled the economy. With Bear Stearns, the government provided guarantees and the bulk of its assets were transferred to JPMorgan Chase, leaving shareholders with a nominal amount.

Under a conservatorship, the remaining common and preferred shares of Fannie and Freddie would be worth little, and any losses on mortgages they own or guarantee could be paid by taxpayers. A conservatorship would operate much like a pre-packaged bankruptcy, similar to what smaller companies use to clean up their books and then emerge with stronger balance sheets.

http://www.gata.org/node/6556

[Turbineguy]

1. Since it's unlikely

that the Government can get former stockholders who sold out early to turn over their profits, or get the Execs to return their fat bonuses this seems like a reasonable solution. After all, do we really need another 1930's sytle meltdown?

What comes out of this is that the doctrine of setting up a government function and then privatizing it, does not work.

People who are buying this stock at this point must know that they are speculating and have to expect the possiblity of a loss.

One way or another, somebody will have to pay and it's either those who borrow in the future or the taxpayers.

People who own houses now have seen their valuations drop far greater than their share-cost of a bailout would ever be.

[Warpy]

2. I sold eight months ago at a small loss

so there's a big whew! for me.

Hefty profits haven't been made for a few years now, so tracking back would cost more than it's worth.

However, going after the executives who made so many bad decisions leading to company insolvency seems a prudent course of action. Sue them for malfeasance, malpractice, whatever.

One of the two worst things Johnson did was making Fannie and Freddie private corporations to get their debts off the government's books. The other was putting Social Security into the general fund so that the miniscule overpayment (at the time) could offset the cost of the Vietnam War.

[abelenkpe]

8. no one wants a 1930s style meltdown

but we'll get one anyway.

[screembloodymurder]

3. What will this mean to the market in general?

The dollar was way down after hours on Friday. Someone knew and acted on that knowledge.

[Pale Blue Dot]

5. My opinion: this puts off the inevitable crash for another couple of months

And now that crash will be even worse, if such a thing is possible.

[Celebration]

9. actually, it was announced then, but the details were not known n/t

[gravity]

11. It will add certainty to the markets

Fannie and Freddie was expected to be bailed out by the government anyways, so it isn't a big surprise. Now that the uncertainty with these companies are removed, the markets will probably go up from this.

[Lucky Luciano]

13. no, it was announced at 4:30 on Friday that

a rescue plan was likely to occur over the weekend.

[A HERETIC I AM]

17. Hey Lucky! How was Hawaii?

Hope you had a good time.

Interesting day today, eh?

[Lucky Luciano]

18. The day was NUTZZZZZZZZZZ!!

Let's also not forget about the airlines excitement that we hade with that "mistaken" bankruptcy article about UAUA! We loaded the boat on the gap down before it was halted....then, on the halt we scooped what LCC we could because we knew th bankruptcy article was BS. We have an airlines guy who knows what he is doing and was able to call the various newspapers involved in the fuck up and confirm that their story was a reprint of the 2002 bankrupty that UAUA filed...Load 'em up!!!! We were even buying when UAUA was under $4 though we only got a scrap of that. Wild Wild day..


Hawaii was great...I like Haleakala the best on Maui! Awesome...I drove to the top...did not do hte bike down...gotta get up wayyyyyyyyyyyyyyyyyyyyyyyyyyyyyy too early for that...I am on vacation, so no thanks...besides it did not look fun with you always having to watch for cars on the way down. I liked Hawaii more than I thought I would. Next time will be Kauai and the big island!

[Karl_Bonner_1982]

4. Isn't financial deregulation wonderful? NT

[Raven]

6. What happens to people holding Medium Term Notes from

Freddie and Fannie?

[Celebration]

10. the rescue

is for the note holders. Like, didn't China demand that we stand by these things? I think I read that. Not that I know the details, but the whole thing is being taken over to pay off the bondholders.........

[Virginian]

7. Freddie Mac rep said they don't need govt money.

This morning on one of the DC morning shows, a rep from Freddie Mac said that they still had funds and didn't need the government money at this time. He sounded like they can possibly get through this without needing government money in the future.

Freddie and Fanny had problems with their accounting a few years back. Fanny was a lot worse than Freddie, but they have both been painted with the same broad brush.

[A HERETIC I AM]

12. It appears traders like the idea.

http://www.bloomberg.com/apps/news?pid=20601087&sid=ayjUlfxAd5GU&refer=home

We'll see what happens to the share prices tomorrow. The market had pretty much already priced FNM & FRE for bankruptcy over the last few weeks. Tomorrow will be interesting.

[Hannah Bell]

14. What does "shareholders to be wiped out" mean?

Considering pension funds hold a few of those shares...what happens to the pension funds?


>>Its real aim is to bail out the banks which bought Fannie’s and Freddie’s unsecured debts as investments with the understanding that the US treasury ultimately stood behind these so-called “government-secured enterprises.”

The immediate cost of the bailout will be borne by taxpayers as well as shareholders, who will see their investments wiped out. Part of the plan announced Sunday authorizes the government to buy up existing assets at a nominal price of less than a $1 a share. A significant portion of these investments are held by mutual funds handling 401K plans that constitute the sole retirement savings for large sections of the American workforce...<<<

[upi402]

15. Ben Bernake was under oath in front of Congress saying everything is just fine. n/t

[upi402]

16. Paul Volker says what the Federal Reserve has done may be illegal. n/t