By Laura Conaway

Looking back at the first news from last year's federal takeover of Fannie Mae and Freddie Mac, you can see people searching for someone to blame for the collapse. A year ago today, one Planet Money commenter, Maria Schneider, wrote in to say:

We shareholders will be wiped out with this takeover of Fannie and Freddie. I thought our legal system was a warranty and would prevent the government from stealing from the people. We would expect the nationalization of Fannie and Freddie to be dictated by dictatorial governments such as Cuba or Venezuela. Or is this government a national socialist one?

They are stealing from the rightful shareholders of the company. We trusted the government and their cronies. I am sure their profits will soar with this measure. This is a legal system that protects the little guy, it was anyway until this government came into office. And one thought they were conservative republicans... [This] is an act of thievery.

Which prompted a dose of very strong medicine from Adam Davidson. On this anniversary week, I'll print in full his reply from the first days of the Planet Money blog.

Continue reading "Flashback: Listener Calls Fannie/Freddie Rescue 'Thievery.' Davidson Says Heck No" >

Would you like a loan?

Lisa Poole/AP Photo

In the wake of Fannie and Freddie, some experts are wondering about what would happen if a place like the Swiss bank UBS began to sink. UBS is so big it's like its own country.

Hans Eichel, former finance minister of Germany, said last week that Switzerland itself would be unable to bail it out if something went wrong.

Domenico Sinescalco, who was finance minister of Italy, put it more simply. "Permit me a joke," he said. "God save UBS.

"We don't need a crisis like that in Europe."

I'm curious if, in this global economy, we are breeding larger and larger institutions. No idea if that's true. Thoughts?

If you do, we want to hear from you. Write to us. Or even if you know someone, drop us a line. We want to know how the crisis has effected you, your finances, and what it's like at cocktail parties when people ask what you do for a living.

I used to play basketball with a guy who worked for Fannie Mae. None of us really had the faintest idea what the company did, though he tried to explain it. It didn't seem all that important at the time.

Treasury Secretary Paulson and his feel-good crew gave what were described as pep talks at companies today and yesterday.

For all the commenters who said the Fannie and Freddie bailout is a fully Republican operation: Open Secrets offers a helpful guide to who in Congress got the most Fannie and Freddie money.

The Headline: Obama is third. Democrats make up the Top 5.

Not that Republicans are immune. They are fully represented on this list.

If you detect a slight cocky swagger in my typing, it's not that I love Republicans and hate Democrats. It's that, after years of covering politicians and economics, I've come to the conclusion that they are all excited to bend their policies to support donors and populist sentiment.

I just don't see any facts that back up the idea that Republicans are qualitatively worse. They're all bad.

My hope is that this site becomes a place that is truly and fully non-partisan. I hope that we engage ideas on their merits and let the chips fall where they may.

Please begin writing your angry letters.

Could it have been worse than this? Um, yes.

MPI/Getty Images

 

Adam Davidson sends this audio from a conference of former finance ministers at the University of Virginia. He asked them about the consequences of not bailing out Fannie Mae and Freddie Mac.

Let's just say you don't want to look. But you do need to listen (click above or download here).

Bonus: The All Things Considered segment

I think the world is going through the standard five phases of grieving about the mortgage crisis. The stages are denial, anger, bargaining, depression, acceptance. At this conference here, I'm finally sensing some anger from these folks who ran the treasury ministries around the world. There is relief at the bailout of Fannie and Freddie, but now anger. Anger that the U.S. crisis toyed with global "economic armageddon" (the quote is from Adam's story on ATC tonight). There's lots of talk about how the world needs a more "muscular" regulatory framework to keep a watch on the global economy. But the consensus here is this was a U.S. problem and that everyone else was along for the ride.

Mortgage rates are falling, now that the federal government is rescuing Fannie Mae and Freddie Mac. The average 30-year loan is now .3 percent cheaper, and may get cheaper still.

That's not the only number heading south. The estimable minds over at Calculated Risk say the value of homes -- and for buyers, the sale price -- should continue to slide. Calculated Risk sees a correction of another 15 to 30 percent on the way. Why? Simple supply and demand. Over the last six years, the site says:

[m]onths of supply increased to 11.2 months. A normal range is 5 to maybe 8 months. Until the months of supply decreases to the normal range, prices will continue to fall.

When Nouriel Roubini -- a longtime and reasonably loyal Democrat -- says the Republican administration is helping out the rich at the expense of the taxpayer, you just think: Oh, it's a normal Tuesday.

But Ken Rogoff, the highly respected and self-identified Republican economist, tends to be far more circumspect.

In a Guardian column, he is blistering (in an economist-speak sort of way) at how the world is dealing with the crisis, effectively taxing citizens to give rich finance pros a break.

The financial sector has produced extraordinary profits, particularly in the Anglophone countries. And, while calculating the size of the financial sector is extremely difficult due to its opaqueness and complexity, official U.S. statistics indicate that financial firms accounted for roughly one-third of American corporate profits in 2006. Multi-million dollar bonuses on Wall Street and in the City of London have become routine, and financial firms have dominated donor lists for all the major political candidates in the 2008 US presidential election.

Why, then, should ordinary taxpayers foot the bill to bail out the financial industry? Why not the auto and steel industries, or any of the other industries that have suffered downturns in recent years? This argument is all the more forceful if central banks turn to the "inflation tax", which falls disproportionately on the poor, who have less means to protect themselves from price increases that undermine the value of their savings.

Hat tip to the always helpful, truly wonderful but, sadly, anonymous Yves Smith.

It's a terse, vague press release from FDIC that's got me scared today. (HT: Calculated Risk)

The release -- in high bureaucratize -- tells us that the nation's banking regulators are working with banks on "capital-restoration plans." Then comes the chilling part:

All institutions are reminded that investments in preferred stock and common stock with readily determinable fair value should be reported as available-for-sale equity security holdings, and that any net unrealized losses on these securities are deducted from regulatory capital.

Let me translate.

They are saying that a bunch of banks have so much Fannie and Freddie stock that they are now in serious trouble. They don't have the basic amount of money needed to run a bank, according to U.S. law and regulation.

The banking regulators want to work with the banks. But they're going to hold them to the rules.

This means, I am pretty sure, that we'll be seeing a bunch more banks fail in the coming weeks.

The press release does say most banks do not have risky levels of Fannie and Freddie debt.

Dr. Nouriel Roubini gives his famous "hard landing" talk, September 2007.

IMF.org

Nouriel Roubini is quickly becoming one of the most important economists in the U.S.

He has been predicting, with stunning accuracy, exactly how this crisis would play out.

The New York Times ran a big profile of him.

I did a profile of him back in 2005, when most economists were laughing at his dark views (it was, we now know, the heart of the bubble).

He is not crazy about the Treasury plan for Fannie Mae and Freddie Mac. His analysis, as always, is not the quickest of reads, but it is worthwhile.

Headline: however tough Paulson was on Fannie/Freddie shareholders, he wasn't tough enough. Oh, and the taxpayer might be on the hook for a lot more than almost anyone expects.

When I hear about the mortgage mess, I sometimes find myself thinking that at least we're wiser for it, that this was just a kind of bad first date with the global economy, but we know better now.

That is not the view of Antonio Palocci. Palocci was the finance minister of Brazil, and he spoke up, after some prompting, at this conference I'm attending. (It's filled with former ministers -- the idea being that they can finally speak their minds since they've left their political jobs.)

"I had decided not to speak about this subject because I am a little too pessimistic.," Palocci said. "The question that I ask myself is 'Do we have the capability to avoid bubbles?' I think we cannot."

Bubbles are the result of "inevitable movements of the market," he said. He didn't go into detail, but I think he's talking about the growing quantities of money racing around the world, the tendency of investors to love one product to excess, the inevitable complexity of things. Other former ministers here were more optimistic and talked about how new regulations or institutions might stop bubbles, or at least keep them from growing so big. But Palocci worried instead that things might get worse as national economies merge into a single global one.

He spoke in Portuguese, so an interpreter had to put all that into English. When Palocci was done, John Snow, the former U.S. Treasury secretary, gave his own distillation. "I summarize him by saying, 'We have met the enemy and it is us.' "

One last question for now, this one from Twitter friend @marilynm:

I've heard w/the takeovers interest rates may go down. Why? Lower rates but homeowners get lower appraisals. Only first time buyers benefit?

Still feeling fresh, Adam Davidson replied:

Continue reading "Will The Bailout Make Interest Rates Fall?" >

At a recycling drive in Brooklyn, Chinese goods piled up.

Bob Sacha

 

Debt, to most of us, is something you pay. But to creditors, it's also something you sell. Mortgage agencies like Fannie Mae and Freddie Mac issue so-called mortgage-backed securities to investors -- including, notably, China. Roughly put, we buy tons of Chinese goods, and the Chinese loan us the money back through securities so we can buy more.

Got it?

The numbers involved here are enormous, billions mounting into trillions. Brad Setser, an economist with the Council on Foreign Relations, has spent the last years obsessively researching China's buying of American debt.

What scares him is the idea that China would stop buying the debt -- meaning it would stop financing American mortgages and our general standard of living. An extra jolt: Setser says the Chinese can't go on buying this way forever.

He explained this all to us in a way I could almost completely understand. It's so good, I'm going to listen twice (click above or download).

J Baker writes:

I understand the need to provide stability to this market and to bail out the Chinese Central Bank, but why do the Republicans always spout that they are the Party of less government and then do the exact opposite. As a SMALL shareholder of Freddie I get clobbered, the Chinese get saved, and the Republicans get away with more BS about what they stand for...

We are strictly nonpartisan here, at Planet Money. In fact, we find that economic foolishness is truly bipartisan.

I do not see how you lay the blame for Fannie and Freddie on the Republicans alone. NPR's Peter Overby provided a handy list of the many folks from both parties who have helped Fannie and Freddie avoid the kind of scrutiny that would have prevented the current crisis. The company has close ties to Dems and Republicans, to Obama and McCain and both Bill and Hillary Clinton.

I like this, from David Lentz:

There are people responsible for this, and at several levels. First and foremost are the crooked managers and greedy consumers who willingly assumed huge amounts of risk that they knew they could never repay, and got rewarded for that.

Second, are the elected representatives (senators and representatives) who created Fannie and Freddie to push the pedal to the metal and drive rates lower, to get a happier voting public.

Continue reading "From the Comments: Who Is To Blame? All Of US" >

Rob McAleavy argues:

It is time to seriously look at solid and functional regulation. We hear so often that "free markets" will cure all, and that regulation only hampers these markets. Time and again, these "free markets" fail us -- Savings & Loan, Energy (Enron), Mortgages, Credit Cards(?), health care - essentially due to greed, corruption, ignorance and the demonizing and complete absence of intelligent and forceful regulation. "Free Markets" are never free -- they simply favor some over others. It is time to polish the word "regulation" and put it in its rightful place, hand-in-hand and side-by-side with Free Markets to balance them.

This is certainly a crucial question right now. There are many, many people on the left and the right and the center and all over who think the message is clear: we need more regulation of financial markets to prevent these crazy shenanigans.

I'm going to sit out that debate for right now. We'll be having it a lot here, I think, over the coming weeks and months.

But I will say . . .

Continue reading "Answering the Comments: Blame The Free Market?" >

Maria Schneider wrote in to say:

We shareholders will be wiped out with this takeover of Fannie and Freddie. I thought our legal system was a warranty and would prevent the government from stealing from the people. We would expect the nationalization of Fannie and Freddie to be dictated by dictatorial governments such as Cuba or Venezuela. Or is this government a national socialist one?

They are stealing from the rightful shareholders of the company. We trusted the government and their cronies. I am sure their profits will soar with this measure. This is a legal system that protects the little guy, it was anyway until this government came into office. And one thought they were conservative republicans... [This] is an act of thievery.

Maria, as a shareholder in Fannie and Freddie, I can only imagine how awful a day this is for you. Indeed, you trusted that these quasi-governmental agencies were being well run and that they are safe. Over the last few months, you've seen the value of your shares collapse. Today, the nail was hammered in the coffin.

I will speak some harsh truths to you, though. . . .

Continue reading "From the Comments: Socialist Nationalization? " >

See, it works like this.

Bob Sacha

 

When the news gets tough, the tough reporter heads to Coney Island. Adam Davidson, on the right in the picture above, turned to a carnie for help in explaining the Fannie Mae and Freddie Mac bailout.

Basically, the game here is that the U.S. buys more from China than China buys from us. China then lends us that money back, so we can buy more Chinese stuff. The way they do that is by buying bonds from Fannie Mae and Freddie Mac. And seriously, that's the whole deal -- the simple version of the whole deal, anyway.

Listen here, and you'll understand this giant game of Kentucky Derby in three minutes. Promise.

Rob Paterson paints it black.

Via

If the financial news has you feeling green around the gills, know that you're not alone.

Friend, social media guru and former investment banker Robert Paterson spies the worst in the Fannie Mae and Freddie Mac collapse. Paterson writes, "It is not a blip. It will get much worse. I say this because we have been here before. There is a pattern to what is going on."

He charts that pattern -- and I mean literally charts it -- back to the great European financial collapse of 1348. And we're sending a hug to Prince Edward Island, because whether he's right or wrong about our impending doom, he at least is also charting a solution.

If you're looking to understand today's announcement about the U.S. government swooping in to rescue mortgage agencies Fannie Mae and Freddie Mac, you could start with a New York Times article that appeared on Friday:

"Main Bank of China Is in Need of Capital"

The story detailed the problems that China's central bank faces as its investments in the American economy have turned out poorly. In a bid to finance its ongoing industrialization, China has bought some $1 trillion worth of Treasury bonds and debt from U.S. agencies. A lot of that investment has come in so-called mortgage-backed securities issued by Fannie Mae and Freddie Mac.

With Fannie and Freddie (more on them later) in serious trouble, China's central bank has also felt the pinch. At home, Fannie and Freddie's problems look like blocks of foreclosed homes in new developments. For the global economy, they look a lot scarier than that.

"Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe," Treasury Secretary Henry Paulson told the nation. "This turmoil would directly and negatively impact household wealth: from family budgets, to home values, to savings for college and retirement. A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance. And a failure would be harmful to economic growth and job creation."

It's a frightening prospect, for sure, if not a very clear one. You can follow the coverage on this blog and at npr.org/economy. After the jump, we'll provide a quick primer -- 10 links to stories that need reading now.

Continue reading "The Fannie And Freddie Bailout, In 10 Easy Links" >