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A Short Lesson in Chemistry

Marla Singer's picture


The Obama administration is on the case, don't you worry.  Given that expanding the balance sheets of Government Sponsored Entities, increasing their regulatory caps on assets, and then, when caps could rise no further, permitting them to resort to securitization to move underpriced real estate loans off their balance sheets didn't work, let's relax caps even more, and, while we are at it, give them a blank check drawn on the Treasury.  Bloomberg reports:

The U.S. Treasury Department will remove the caps on aid to Fannie Mae and Freddie Mac for the next three years, to allay investor concerns that the companies will exhaust the available government assistance.

The two companies, the largest sources of mortgage financing in the U.S., are currently under government conservatorship and have caps of $200 billion each on backstop capital from the Treasury. Under the new agreement announced today, these limits can rise as needed to cover net worth losses through 2012.

The Obama administration is “beginning to realize it’s not getting better and it’s not likely to get better” soon in the housing market, said Julian Mann, who helps oversee $5.5 billion in bonds as a vice president at First Pacific Advisors LLC in Los Angeles. “They don’t want the foreclosures now, so they’re saying, we’ll pay whatever it takes to continue to kick the can down the road.”

Translation: This clear, oily smelling liquid I've been using doesn't seem to be quenching the flames.  Hand me that larger jug over there, will you?

It used to be that some alternate reality was the only place we would ever expect to hear this:

Fannie Mae and Freddie Mac now are using a combined $111 billion of the total $400 billion lifeline. Treasury Department officials said they didn’t expect the companies to need assistance beyond what is available under the current caps, barring significant deterioration in the economic outlook.

...and then hear this thirty seconds later:

Under the new agreement announced today, these limits can rise as needed to cover net worth losses through 2012.

The changes mean that rather than needing to trim their portfolios, Fannie (with around $770 billion in holdings) and Freddie (with about $760 billion) can collectively expand them by almost 18% or another $270 billion in 2010.  The Treasury explained:

Treasury does not expect Fannie Mae and Freddie Mac to be active buyers to increase the size of their retained mortgage portfolios.

So.  Let us summarize:

We do not expect the GSE's to grow their portfolios at all, so we are fixing the bloated portfolio problem by easing the portfolio caps to permit a quarter trillion dollar expansion thereof.

We do not expect either of the GSEs to need more help from the Treasury, so we are responding to the underutilized $400 billion "lifeline" the GSE's have with the Treasury ($111 of which is currently used) by expanding it to... infinity.

Oh, and though they have collectively lost nearly $200 billion, we are paying the CEOs around $6 million each.

Great work team!  It's already almost 11:00.  Let's go to lunch.


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Thu, 12/24/2009 - 20:03 | Link to Comment SWRichmond
SWRichmond's picture

I'd just noticed the Bloomberg piece as well, coming back to my laptop getting ready to shut it down for Xmas Eve.  The headline caught my eye.  Figured ZH would have picked it up, and here you are.

I was just beginning to think this dollar rally had some legs.  Now I'm not so sure.  That probably means the dollar will rally like crazy, which it would be, but then, what isn't?

Enjoy the holidays!

Thu, 12/24/2009 - 20:59 | Link to Comment suteibu
suteibu's picture

I'm not so sure either, especially after this from

TOKYO (Nikkei)--The yen could strengthen to 87 versus the dollar over the next month now that weeks of greenback-buying are coming to an end, limiting the dollar's upside at 93.

The dollar's downtrend could continue for years. Once U.S. long-term interest rates stop rising, the greenback will start to decline.

Two factors aided the dollar's recent appreciation against the yen. First, overseas funds closed out their positions in advance of the year-end and New Year's holidays. Second, U.S. economic indicators improved, the reason behind the upturn in long-term rates there.

But this was temporary. The greenback was strong against other major currencies until midmonth, but since then has been treading water versus the euro, indicating that position-adjusting dollar-buying has run its course. U.S. long-term rates are as high as in August, and further increases are unlikely.

America is saddled with chronic current-account deficits, and an exit from its ultralow interest rate policy is not expected soon. As a result, the U.S. currency will gradually weaken against the yen, with the Japanese currency hitting 85 at the end of March and approaching 82 at midyear.

--Translated from market commentary by Junya Tanase, senior foreign exchange strategist at JPMorgan Chase Bank

(The Nikkei Veritas Dec. 24 online edition)

Thu, 12/24/2009 - 20:08 | Link to Comment deadhead
deadhead's picture

Insanity is the new Household Sector.

Thu, 12/24/2009 - 20:26 | Link to Comment EconomicDisconnect
EconomicDisconnect's picture

Thanks for giving that item a larger audience.  Just unreal.  Can nothing be done to stop this insanity?

Fri, 12/25/2009 - 00:18 | Link to Comment Reductio ad Absurdum
Reductio ad Absurdum's picture

IYR closes at a 52 week high.

IYR back to 2004 levels while SPG (its largest component) is at 2006 levels. Hey IYR, what's taking you so long?

Thu, 12/24/2009 - 20:41 | Link to Comment Anonymous
Thu, 12/24/2009 - 20:51 | Link to Comment RobotTrader
RobotTrader's picture

The mortgage insurance hookers are alive and well..



Thu, 12/24/2009 - 21:00 | Link to Comment Argos
Argos's picture

Sophistry.  "Next year's Social Security payments will be decreased by 50%.  Medicaid goes to zero.  Doctors will now be taking chickens and pigs as payment for services.

Thu, 12/24/2009 - 21:30 | Link to Comment Anonymous
Thu, 12/24/2009 - 21:50 | Link to Comment Anonymous
Fri, 12/25/2009 - 10:24 | Link to Comment Anonymous
Thu, 12/24/2009 - 22:07 | Link to Comment Masked Man
Masked Man's picture

The government doesn't "expect" to use up the full $400 billion, but is going to eliminate the cap anyway. Good one.

All I'd like to know is how many trillions is it going to cost to make good on the derivatives on the books of Fannie and Freddie?

Thu, 12/24/2009 - 22:13 | Link to Comment Unscarred
Unscarred's picture

A person who can't pay, gets another person who can't pay, to guarantee that he can pay.  Like a person with two wooden legs, getting another person with two wooden legs, to guarantee that he has got two natural legs.  It don't make either of them able to do a walking match.  And four wooden legs are more troublesome to you than two, when you don't want any.

- Mr. Pancks, from Little Dorrit

Thu, 12/24/2009 - 22:24 | Link to Comment Molon Labe
Molon Labe's picture


Thu, 12/24/2009 - 22:44 | Link to Comment Anonymous
Thu, 12/24/2009 - 23:08 | Link to Comment Mark Beck
Mark Beck's picture
It is interesting that I could not find a reference to the amount of Preferred shares exchanged for Treasury aid in the actual bill. See link; But, I am assuming that an additional infusion of aid would mean the purchase of more Preferred shares by Treasury. The Fannie market cap is $1.17B. With the amount of capital (Preferred stock) owned by Treasury, the Government is by far the largest investor.  So the line:

"The U.S. Treasury Department will remove the caps on aid to Fannie Mae and Freddie Mac for the next three years, to allay investor concerns that the companies will exhaust the available government assistance."


So who are these investors that will be reassured by this action? Is it safe to say that this statement is just BS? If so, why do the GSEs need another infusion of cash? 


Well perhaps time has run out for the GSE restructuring, and in the new year, with accounting rule changes, the GSEs are essentially insolvent, and will need additional capital just to stay out of bankruptcy. So this move is to fund GSEs losses in their current portfolios, and not necessarily to expand their holdings. 


I am also not sure about the current magnitude GSE losses. My guess would be that a lot of the worse paper has been purchased by the FED. So a significant portion of the losses are no longer on the books.


Is this then really an acknowledgement that the FED+GSEs have recognized that you cannot fight the market and win. Is the market now recognized as victorious in the real estate price battle. So the battle is over, and the GSEs are bracing for the worse.




Mark Beck

Thu, 12/24/2009 - 23:25 | Link to Comment Assetman
Assetman's picture

One should ask the Obama administration how they are going to finance this monstrosity.  I gather all those "cost savings" from the new improved Health Care Bill will cover everything Fannie and Freddie need.  One would think we might be waking up to a spike in sovereign CDS come Monday, at the very least.

It's interesting that the Fed isn't getting directly involved in this unlimited backstop, though.  I get the impression that they might just follow through on ending their asset purchase plans.  At some point, I gather they should throw everything in the lap of Barry O and his crack Economics team.

One wonders how CONgress will respond to this, given the Treasury seems to be creating its own authority to write blank checks ad infinitum.  There is absolutely no fiscal responsiblity here.

Between this and the Health Care debacle, the Dems are going to bury themselves through 2012.  Couldn't happen to nicer bunch of guys.  

Fri, 12/25/2009 - 08:11 | Link to Comment Anonymous
Fri, 12/25/2009 - 18:47 | Link to Comment Assetman
Assetman's picture

Heh-heh... you made me giggle a bit, dude!

Fri, 12/25/2009 - 11:00 | Link to Comment deadhead
deadhead's picture

I get the impression that they might just follow through on ending their asset purchase plans. 

Interesting that you mention this.  I've thought about this, particularly in light of the Bernanke renomination matter (i think he will go through utlimately).

Is it possible that the Fed, once Bernanke is back in long term, decides to act responsibly and cut out some of the insanity?  do they recognize finally that their policy has created bubbling?  do they set some limits because they recognize what most of us do in terms of looking down the long term road?

I don't know.  My initial reaction is like others in that the Fed will continue to accommodate politicians, print dollars like mad, etcetera.  Naturally, they will always do what is in the banking sectors' interest first and foremost (the whores).

however, maybe, just maybe, they will realize that the furious pace of their moronic action needs to take a step back and let markets settle down a bit. 

Fri, 12/25/2009 - 19:04 | Link to Comment Assetman
Assetman's picture


I think it's simpler than that.  The Fed had effectively invoked the "exigent circumstances" clause to justify the agency/Treasury/MBS purchases-- which on most planets in the galaxy are fiscal actions, not a monetary ones.

Once we get to March 2010, what justification do they have that exigent circumstances exist, with positive GDP growth?  None, really. 

The smartest thing for Bernanke to do after he gets renominated, quite frankly, is to focus on monetary policy and stay neutral.  If Obama, Geithner, and the Dems in Congress want to fall on their own sword by ballooning the deficit and pushing bond yields higher to bail out even more banks-- so be it.  Bernanke is doing quite a bit for his own member banks by allowing them the tap the window at 0%.

And if things can back to panic stage again, no doubt he will bring out new lending facilities all over again.  This inital move by the Treasury Department makes perfect sense, if you are determined to save and hide Freddie and Fannie.  My hope is that is backfires big time.

Thu, 12/24/2009 - 23:42 | Link to Comment rawsienna
rawsienna's picture

Two comments

1- Notice how the CEO's refused to accept any compensation in stock.  When a stock is trading at a buck, that is all you need to know about a future viability of the business.

2- At current valuations, do not expect the GSE to buy any MBS.  They are negative spread to their funding. In fact, they should probably do us all a favour and punt 50-100bb MBS to the FED while they are still buying!!

3- Additional point. The agencies have about 150bb of non-performing loans on their books that they receive no payments on but are advancing scheduled interest and principal to MBS holders.  This a massive wealth transfer from the agencies (ie: taxpayers)to bondholders (they are above market coupons that are owed) of about 10-12bb a year. Under more normal curcumstances, the agencies would purchase these loans out of MBS pools (a prepayment for the holder of a premium security), take the loans on their books and mark the loan to market. That takes capital (expensive 10% coupon from treasury)and balance sheet.  Given some accounting changes that take place JAN 1 combined with new balance sheet, they can finallt buy these loans out from MBS pools and save taxpayers billions of dollars.  How about some fiduciary responsibility for a change!!!

There is more these gse can do to save money for the taxpayers. For example, the Treasury should MANDATE the elimination of loan level price adjustments (fees) for any agency to agency refi that is NOT a cash out. It reduces credit risk and will SAVE taxpayers money. While the FED bought a trillion mtgs to bring down mtg rates, banks and the GSE increased their fees making it less likely for borrowers to refi. 



Fri, 12/25/2009 - 04:36 | Link to Comment Anonymous
Fri, 12/25/2009 - 11:19 | Link to Comment rawsienna
rawsienna's picture

G-fee remains but LLPA's are extra fees to adjust for extra risk.  They are perfectly appropriate for new purchase loans as well as any cash out refi's. True, it would impact the value of premium securities in the market place but the higher coupons would still trade at healthy premiums due to the steep yield curve and the fact that not all borrowers in a MBS pool have the same refi  response function.  There would be little impact on mtg rate to the to good quality borrowers in that current coupon TBA already reflects the credit/convexity of 70 ltv 740 Fico borrowers. During past refi waves -when there was no llpa due to rising home prices, cuurent coupon spreads were not much different than today. Premiums within 100 bp of cuurent coupon were about 1/2 point lower so no, the TBA market would not fall apart.

The government already has the credit risk.  Just because they did not charge enough for it when the GSE put it on their books (2003-2008) is not the borrower's fault.  Charging good borrowers (people who are current on their mtg but have LTV above 80 due to home proice decline) up to an extra 2 points up-front to refi an existing agency loan does not help anybody. As a taxpayer, I rather see em refi into a lower rate while they can rather than take the risk that if home prices fall further they walk away. That is the whole point of the FED buying mortgages - bringing the rate down so that people with good credit can get loans -along with the stimulus provided by lowering peoples monthly mortgage payments.

Just noticed.  Your point about bad credits is valid in that premium securities would trade at lower dollar prices.  They would still have to pay the llpa for purchase loans but if it rolled into the rate it would be more expensive.  However, the fact that home prices can go either up or down has shown that high ltv/low Fico lending is probably a loser even at the current 2 point llpa max. That is more of a political issue - good borrowers subsidizing the bad risk (like most insurance). I am sure there are some out there that believe that is was lending to bad borrowers that got us in this mess to begin with. I believe in the social value of helping first time home buyers having access to credit but at what cost? Is a 10% downpayment too much to ask for?  Are "bad" credit borrowers better off if the end up owning a house they cant afford? Again - political issues.


Fri, 12/25/2009 - 01:10 | Link to Comment Rick Blaine
Rick Blaine's picture

"The U.S. Treasury Department will remove the caps on aid to Fannie Mae and Freddie Mac for the next three years, to allay investor concerns that the companies will exhaust the available government assistance."

Granted, I'm not such an investor, but this bit does not allay my concerns about anything...

...and even if I was an investor, I don't think it would give me what I would call a "warm fuzzy."




Fri, 12/25/2009 - 01:21 | Link to Comment Oracle of Kypseli
Oracle of Kypseli's picture

Vox populi vox Dei, death by quintillion dollars.

Exos Fexos Thanatos

Fri, 12/25/2009 - 02:56 | Link to Comment Herd Redirectio...
Herd Redirection Committee's picture

Any one hear that the Pope was 'assaulted' at his Xmas mass today?  A 'mentally unstable' woman jumped the rail and managed to pull the Pope to the ground before security intervened.

Between this and the Berlusconi incident, and the Obama secret service lapses, I think the Powers that Be are sending a message to all their lackeys, henchmen, puppets...  Do as you are told, or you will be involved in an accident, caused by some random "mentally unstable" person...

Just a though!!!

Fri, 12/25/2009 - 04:47 | Link to Comment Lonewar
Lonewar's picture

The reason for this is easy.

Under the Obama Making Homes Affordable program, Fannie and Freddie are required by law to try to adust mortgages so home buyers can stay in their homes.

The first thing they have to do in this situation is to buy the Mortgage back from the CDO that it is in, at Par...

Then they get to play with the numbers on the loan for 5 months, and when all is said and done, they get to forclose the house, mark it to market, and sell it at a huge loss.

This is just another scam to make the banks richer. This is why banks will not foreclose or write down loans, they are hoping the occupier will apply for this program so they can be paid at 100 cents on the dollar.

And the reason they upped the limits to infinity is that Fannie and Freddie have to absorb 5 trillion dollars in loss, or try to before we go Zimbabwe. (10 trillion in real estate lossing 50% of its value...)

This is why Soros and Flowers and Paulson bought IndyMac, so they could encourage the clients of the second biggest sub-prime lender to apply for this program and also know exactly what sub-prime CDO garbage to buy for pennies on the dollar to be paid for it at face value.

Fri, 12/25/2009 - 05:02 | Link to Comment rawsienna
rawsienna's picture



The only are required to try to adjust mortgages that they already guarantee. Yes, those loans have to be bought back at par from an already existing MBS pool. They have lots of problems but buying loans out at par from any private label securitization is not one of em. 

The losses at the GSE will continue to be enormous and the HAMP program will likely make it worse - but the current scam is that the FHA still allows 3% downpayments. The one lesson from this mess that the Govt seems to not have learned is that when you lend people money, they need to have skin in the game. 





Fri, 12/25/2009 - 11:07 | Link to Comment deadhead
deadhead's picture

The one lesson from this mess that the Govt seems to not have learned is that when you lend people money, they need to have skin in the game


There are certain fundamentals of lending that must be followed and this is one of them.

We have seen what happens when this is not followed.

We will see the same result with FHA, due to this stupidity, in 2010-2011.  I would argue that FHA is probably close to insolvent on its own right now (capital ratio down to .53% I think the number is??).  We will NOT see FHA go down before mid terms for the obvious political reasons, but it is toast.


Fri, 12/25/2009 - 05:33 | Link to Comment Daedal
Daedal's picture

Obviously you're not well versed in political theory of conservation of costs; 3 + 4 = 1.

Fri, 12/25/2009 - 08:33 | Link to Comment Zippyin Annapolis
Zippyin Annapolis's picture

Neither the Treasury nor House, Senate Dems have the mustard to tackle this festering sore as part of Financial Reg Reform. This is like passing a law to ban gambling and subsidizing the rent on the casino/ whorehouse.

On reflection that is exactly what Financial Regulatory Reform Bill is all about--supporting the status quo and making sure the large banks are happy and well fed at the end of the day.

Fri, 12/25/2009 - 11:33 | Link to Comment bugs_
bugs_'s picture

Lost another one to dietech!

Fri, 12/25/2009 - 12:29 | Link to Comment aint no fortuna...
aint no fortunate son's picture

Even if I thought this was an innocuous announcement (I certainly DON'T), the timing was just so perfectly despicable and paranoid that they shot themselves in the foot... did those fools think they could just slip a note under the door in the cover of darkness and expect that nobody would see it?

Fri, 12/25/2009 - 12:56 | Link to Comment deadhead
deadhead's picture

the great news is that it is garnering much more ink than they had hoped. 

these people are insane.

let's hope the bond vigilantes start to teaching the lesson once again.

Fri, 12/25/2009 - 13:18 | Link to Comment Anonymous
Fri, 12/25/2009 - 14:40 | Link to Comment TheGoodDoctor
TheGoodDoctor's picture

Is it just me or are they basically saying by this move. "It's going to get much worse."

Fri, 12/25/2009 - 19:20 | Link to Comment Assetman
Assetman's picture

Yes, but they knew that the day the Federal Reserve announced buying MBS and agency debt back last March.

Here's the real message, which I'll put in fake quotes:

"We see the end to the Fed conducting fiscal policy, and really do not want Congress to take fiscal actions on Fannie and Freddie. So look, we are taking this loophole and will make all fiscal decisions regarding Freddie and Fannie before Congress takes control of this on January 1st".

It really makes you think whether Rahm Emanuel is trying to hide something nasty with the GSEs, because he rubber stamped executive decisions when the rape was at its worst.


Fri, 12/25/2009 - 14:40 | Link to Comment Anonymous
Fri, 12/25/2009 - 14:42 | Link to Comment Anonymous
Fri, 12/25/2009 - 18:33 | Link to Comment deadhead
deadhead's picture

so, is this actually the "bad bank" concept in play?  all the crap will be funnelled through the GSEs, which will pay out par on the mortgages to the banking industry, and then the GSEs will write down the principal and unload the houses?

Fri, 12/25/2009 - 18:44 | Link to Comment Unscarred
Unscarred's picture

Merry Christmas, deadhead!

Sat, 12/26/2009 - 00:48 | Link to Comment TheGoodDoctor
TheGoodDoctor's picture

IE The shell game continues at the expense of the American taxpayers. So, how much will these houses be sold for? Who will buy them? Where does the private equity come into this equation?

Sat, 12/26/2009 - 12:30 | Link to Comment Anonymous
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