Yet Another Weekend Bailout
September 7th, 2008 by 
reality
The Federal government put Fannie Mae and Freddie Mac into “conservatorship,” essentially the same as Chapter 11 bankruptcy. New capital will be supplied by the taxpayer, with the intention of keeping the money pumps going.
As far as I can tell, Fannie and Freddie have been corrupt enterprises for years. It appears to me that the value of the implicit Federal guarantee, now explicit, has been, in effect, skimmed off to pay huge sums to executives and rich dividends to shareholders while keeping lawmakers quiet with extensive “lobbying activities” - read cash. Supposedly these will all stop. We’ll see.
In any event, there was no real choice. The bailout was inevitable and could have been much worse from the moral hazard point of view. The real question is, where is the accountability? This is a huge train wreck, and yet the train drivers are getting away without even a slap on the wrist. Clearly there has been systematic misrepresentation of the financial state of these companies. Perp walks are required.
At the end of the day, it doesn’t matter. The deleveraging will not stop. There will be more failures and more bailouts. Probably the most significant part of the announcement is that the Treasury will directly buy GSE MBS. This means that mortgage rates will now be set by the Treasury, and in effect the mortgage market is now completely socialized. That usually works well, doesn’t it? But Bill Gross got the bailout he was whining for and looks to have a winning trade on his hands. I guess you can never underestimate the willingness of politicians to mistrust markets.
Posted in Bill Gross, Fixed Income, Government, Real Estate, Rogues and Rascals | 
September 8th, 2008 at 5:37 am
If the government is now setting mortgage rates, then everyone should now get the same rate. Ridiculous. Just ridiculous. And the dollar is actually up! I guess the Asians and OPEC nations that blithely fund our deficits are even dumber than us. This is why I believe everyone should own a little gold.
September 8th, 2008 at 3:21 pm
The dollar has been substantially undervalued for a while - especially against the pound. The difference was really shocking and so some correction was inevitable even if the structural issues don’t favour the dollar over the long-run. What will be spectacular is America’s conversion into Japan 2.0.
We also need to remember that these issues aren’t just American issues - for a normal business cycle, Europe and Asia would be in worse shape (compared to a year ago) than America at this point.
September 8th, 2008 at 3:30 pm
Yes. I think the Big Mac index substantially overstates PPP for the pound at 1.56, I think from personal observation that it should be more like 1.20 or so. The euro at 1.06 is realistic, to maybe a tad low.
September 8th, 2008 at 4:58 pm
Rereading this I’m not making myself clear on what I mean about Europe and Asia - basically, they’re in bad shape as well and in many of the main economic numbers are in substantially worse shape than the USA to start with, or facing much faster decelerations than the USA.
We need to keep in mind (and tongue in cheek) that the US in a massive recession has the same headline statistics as France (unemployment, GDP, etc.).
September 8th, 2008 at 5:00 pm
As for the Big Mac Index - I wonder what percentage of London’s Big Macs are in London, where vs. New York 1.56 seems about right (although October 2007 was the last time I was in London).
September 9th, 2008 at 12:00 pm
Views from Europe. FT Alphaville blog:
With the Fannie and Freddie rescue, Hank Paulson has shown that the US is using further debt-creation to clear up after the credit party. The former investment banker has in essence converted the Treasury into the US hedge fund of last resort (with the Federal Reserve as its prime broker). Europe, meanwhile, is letting recession do that work. The UK is following a middle path, hoping that sterling’s depreciation will shield it from depression. Judging by the dollar’s continuing rally, most money seems to be on the US emerging first.
http://ftalphaville.ft.com/blog/2008/09/09/15724/pink-picks-ff-bail-out-special-edition-plus-the-lses-agony/