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Barney Eats Seconds - Or Blows Smoke - Or Both
Yesterday Barney Frank came out with a letter addressed
to some of the big banks putting some muscle on them. He wants them to
write off their second lien mortgages. He thinks the seconds are junk.
His words:
"Large numbers of these second liens have no real economic value."
In this case I just want to shoot the messenger. Not the message.
Subordinated debt is not money good when there is a problem. Period.
There is a problem and the Second’s deserve the losses. In that sense I
would support the pressure on the banks to move more aggressively to
write this unpayable crap off. It is part of the cleansing process.
Mr. Frank has lost his right to contribute to this debate any longer.
He speaks with a forked tongue. As Chairman of the House Financial
Services Committee Congressman Barney Frank is well aware of the
financial activities of the D.C. mortgage Agencies. I don’t believe he
calls the shots or even has a veto on significant policy decisions. But
I also doubt that anything big happens without his knowledge. If he
strongly objects to something it either won’t happen or it will get
restructured to where he will bless it.
With that in mind it is important to look at how the subordinated
creditors (seconds) of both Fannie Mae and Freddie Mac have been
treated. The answer is they are being treated like kings. The holders
of the Sub debt are making a bundle. They should be facing a near total
loss.
The following are three slides of Fannie’s Sub debt. Note that these
bonds trade on a daily basis, that they are trading at significant
premiums to par and also that our pals at Moody’s and S&P rank this
swill at a very respectable AA.
How could the subordinated debt of a functionally bankrupt entity be
trading at a premium and be ranked investment grade? That’s easy. D.C.
put the “fix” in on this one. Here’s the language from Fannie as to how
this magic could happen:
Freddie did not want to be bothered with the problems with its sub
debt. They just bought it in. They borrowed from the Fed to do it. This
was part of the $175b of unsecured debt of the Agencies that was part
of the QE process. Here is the public announcement of the Freddie buy
back. Note that the bonds were bought in at significant premiums. I wrote a piece on this back in July. I referred to this buyback as heinous. It’s still heinous.
Barney Frank owes us an explanation. How can he maintain that second
lien mortgages have no economic value while he supported a money good
attitude toward the sub debt of the Agencies? He can’t have this one
both ways. If he tries to have it both ways it will just prove that he
is an opportunist blowing smoke at the electorate.
That the Sub Debt got favorable treatment in the conservatorship was a
historical mistake. I don’t think it was a mistake at all. It was quite
deliberate. Some big shots put some muscle on some folks to get this
carve out. I, for one, would like to understand where that muscle came
from.
The numbers here are both big and at the same time rounding errors. The
total of the sub debt in question comes to only$15 billion. The
taxpayers will pay this in full. The total losses the taxpayers will
bear as a result of the Agencies will exceed $500b. So the question,
“What’s another $15b in the scheme of things” is relevant.
For me this $15b is a number the taxpayers should not bear. It is
exactly the same mentality that went into the back door bank bailout re
AIG. That deal ended with the banks involved getting paid 100% when
they should have been entitled to a much smaller number. The Fan/Fred
sub debt treatment is no different than that.
So Congressman Frank which door do you choose? If you want to do the
“right” thing today, you have to reverse the “sins” of yesterday.
Possibly the best choice is to choose neither. Having been part of the
sins of the past you make a very poor spokesman for what should be done
today.
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STEALTHCARE 2010 - coming soon to a hospital near you!!
haha check this out hilarious. the dept of tres has a youtube account linked to a video of how to ahhemm backdoor your gf!
http://lebed.biz/ustreasuryincompetence.html
When is enough of the mainstream of Americans going to get it? When are enough of us going to realize we are be fucked from every direction.
Fuck Barney, fuck Tim, fuck Hank, fuck Larry, Ben and Robert, fuck everyone of them and fuck everybody who appointed or aided them in any way to become leaders in our country. Fuck you too Mr. President. You were the President of HOPE, know you are President NOPE. You appointed/hired/invited the leaders of our economy, So Fuck you Obama. You own this now. I voted for you. Even cried (a little) at your inauguration. You are just one of them. Fuck you Mr. President.
I'm glad I'm living on an island far away - when people actually figure out that they have been continually fucked AND that there is no way out, its not going to pretty. I want to be as far away from the USA (that I love) as possible.
I'm not a gun carrying American. I hate violence. So I live far enough away to not have to deal with what is sure to come, my way of protecting myself is simply to not be there.
Good luck, oh and Fuck you.
gee, thanks. I choose to stay and help pick up the pieces. Suffer if i must alongside my american neighbors. This is home, even if it is a little dirty. So we will clean it up!
The sooner we wreck, the sooner I can trade my chair for your oranges. We CAN make things in america, we can have an economy if we close off imports.
A-freaking-men.
Barney Frank is a gigantic waste of space. He's exactly the kind of nasty, sleazy, corrupt, no-principles politician our founding fathers warned us about.
and Dick Cheney was a prize ??????????????? the no bid contracts HAL got was a gift to the us taxpayer !!!!!!!!!!!!!!!!!!!!!!!!!!! and the iraqnam war paid for itself too !!!!!!!!!!!! right DDDDick ????????
One major difference between second lien debt and Fannie/Freddie subdebt - the homeowner doesn't have the Treasury injecting equity beneath their second lien.
Since Treasury decided to inject money via preferreds, there was no way to subordinate debt beneath that, so it became money good.
Basically anything above Treasury's position is good, anything below, like other preferreds and common, is worthless.
GFI, thanks for the explanation. The question still remains, "Why was the treasury into those preferreds when all knew that there was and is no sovereign gurantee?"
They got in at that level to give a payout to the bankstas and, perhaps the Chinese. Were the Chinese in subordinated paper? I doubt it.
I doubt the Chinese were in subdebt, but Treasury couldn't squeeze out the subdebt holders because coming in senior to them wouldn't count as equity, and remember the GSEs need equity, not debt, capital, in order to stay solvent. The highest Treasury could go on the capital structure was preferred.
So the subdebt holders were basically free-riders. They were wedged in a position above where the government needed to come in.
Adding good details here. One of the stranger occurrences at that instant was how a lot of smaller community or regional banks previously held, for investment & return on RBC purposes, FNM or FRE preferreds at attractive yields. At the encouragement of regulatory officials, no less (if my recall is right).
All those previously held preferreds suddenly creating another hole in the nation's bank capital structure.
We dont want your stinking paper dollars anymore.
We want GOLD.
Thats what we learned.
Thats what has changed.
We dont care about you.
We are like you.
We care about ourselves.
We are just like you.
Thats why we want GOLD.
Outstanding work Bruce!
he is an opportunist blowing smoke at the electorate ... nuf said
We dont want your stinking paper dollars anymore.
We want GOLD.
Thats what we learned.
Thats what has changed.
We dont care about you.
We are like you.
We care about ourselves.
We are just like you.
Thats why we want GOLD.
And the stress tests (yes, the same fake "stress test" from last year) showed the big banks estimating losses from 2nd liens at around 13% - 14% (Citi to its great credit estimated it at a very high 20%!!). So, if these 2nd liens are worth junk and the big 4 banks have $480bn of 2nd liens on their books and estimated just 14% in losses, does Barney Frank mean to say that there is a big f%^&*($ hole in the banks B/S (gee, I didn't know, I thought all the big banks are safe and sound, Geithner himself said so and "proved" it by the stress test results!).
For his own good, Barney Frank should shut up, if the banks stop the charade and even remotely heed his advice, we will have financial crisis # 2.
Everyone is made whole, except of course, the US taxpayer.
Well all know where Barney likes to blow his love smoke....
Barney should eat till he thinks hes being waterboarded- then maybe he'll just shut up and piss-off.
Barney would be in a position to know that the sub debt is worthless, as he can see inside F&F.
Any reason why these same banks could not also be the sub creditors of F&F? Is Barney telling them -- in code -- that they cannot swill from the trough while also enjoying suspended mark to market?
I thought there was wind of FNM/FRE going back on the banks and making them re-purchase the bad loans that they had originated... but haven't heard anything about this for a while. Maybe this is just the alternative spanking?
Who has that kind of Muscle? My guess is it starts with CH and ends with INA.
My number one guess..
bk
something tells me Healthcare will be passed, Obama will be hailed as a Hero, a backdoor pass will be given to Congress to tax us back (and more) using Healthcare as a smokescreen under the name of cutting costs. That may be the hidden motive behind Healthcare.
BF is a the poster man for economic and financial class of dunces.
I will second that one.
Dunces are inherently hoodwinked, naive and innocent.
That is not how to accurately describe the mound of blubbery, pudgy flesh that passes for Frank.
Nothing happens that of his own invention and you can bet that he's doing mighty well somewhere in the offshore accounts, right next to Charlie Rangel.
I agree with what you say. However the def of a dunce is a dolt, dull witted, and stupid. This is hisness to a 't'.
Good analysis, Bruce. Government arrogance and hypocrisy rolled together Barney-style.
All of this becomes easier to understand once we realize that F/F are the " BAD BANKS ", publically traded and subsidized into infinity by full faith and credit. Their worthless seconds are different from the worthless seconds of the others. F/F are the mega-zombies, doing what they are intended to do...socializing losses.
Barney Eats Seconds?
That's gross.
And insult enough, I suppose.
Instead coulda left it that "...Barney Blows.." and been right on two counts.
Great stuff, Bruce.
+1