Lots of questions still surround bailout
There's more we don't know about what's going to happen in the mortgage finance market than we do know. To get some perspective on the bailout of Fannie Mae and Freddie Mac, Kai talks with Karen Shaw Petrou at Federal Financial Analytics.
Signs at Fannie Mae, Freddie Mac buildings (Getty Images / Marketplace)
More on The Economy, America's Financial Crisis
TEXT OF INTERVIEW
KAI RYSSDAL: It's not a stretch to say there's more we don't know now about what's going to happen in the mortgage finance market than we do know. Starting with the eventual pricetag Janet mentioned. To get another perspective we've called Karen Shaw Petrou at Federal Financial Analytics in Washington.
Karen, welcome to the program.
Karen Shaw Petrou: Hi. Thank you.
KAI RYSSDAL: What do you think the odds are of this not working out the way Secretary Paulson wants it to and of taxpayers getting stuck holding the bag?
Petrou: Well, the odds are not small. Nothing has worked so far. So I think we need to be cautious about this. Treasury is doing the best it can with a set of really crummy options. It didn't want to do this, now it has and I think we all need to hope that this works because it's hard to even contemplate what else would have to happen if this doesn't take hold in the market.
RYSSDAL: Go ahead and contemplate. What else might happen?
Petrou: The next step, if Fannie and Freddie can't make it through the conservatorship, I guess, would be a receivership. Treasury right now has set this up so that would never happen. and a receivership is like a bankruptcy. The shareholders are completely cut out and the debt goes onto the federal budget and it's essentially nationalized.
RYSSDAL: I suppose it's important to point out that, as of right now, there's no federal money in this thing yet. There's no federal money in Fannie or Freddie right now.
Petrou: No. There will be at least $2 billion -- a billion each in each of the GSE's very, very soon. And I would expect a fair amount to follow. What Treasury is hoping is that even if they put the $200 billion or more, that the underlying assets of Fannie and Freddie are worth enough so that the net cost of all of this to the federal government doesn't approximate the actual outlay. That's really the bet. And it's a high-risk bet because of the way the mortgage market is these days.
RYSSDAL: Speaking of that, help me understand how this fixes or at least goes some way toward making the housing market better?
Petrou: You have to think of the housing market as having two problems. One is liquidity. By promising all this assistance, including a new window, the Treasury has basically said, "Mortgage market, financial markets, don't worry. As much money as Fannie and Freddie need, we'll keep the taps open." And that's a big help. That should reduce the funding costs and also mortage costs. But there's another problem, and that's solvency. Because a lot of the mortages Fannie and Freddie hold are going to go to foreclosure or are already in foreclosure. And there's nothing Treasury can do to make that better. That's already happened. The new loans might be better, but we've got to work through all the old loans. And that's really the risk to taxpayers.
RYSSDAL: I wanted to ask a question about the mechanics of this. The government has stepped in. They're going to backstop Fannie and Freddie for the next year. But then they're going to start reducing their exposure in the mortage markets by about 10 percent a year. Is this the government finally getting out of the business of fostering home ownership in this country?
Petrou: I think that remains to be seen. The plan is to run the portfolio down, as you rightly say, starting in 2010. But I think in 2009 we're going to do something else. We're going to nationalize, privatize or restructure Fannie and Freddie so that the portfolio issue becomes a secondary one, after we know, much more profoundly, what are we going to do with them?
RYSSDAL: Is this bailout enough to get the credit crunch at least a little bit unstuck -- the larger financial problem?
Petrou: It should, and so far this morning is, moving money. And that's been the huge, huge problem. The cost of funds to Fannie and Freddie went down a lot this morning. If it stays down and, importantly, if Treasury does what it promised and the new GSE's cut their fees, cutting those out, as now will be done, should improve mortgage availability and affordability a lot. At least that's the plan.
RYSSDAL: Karen Shaw Petrou is the managing partner at Federal Financial Analytics in Washington. Karen, thanks a lot for your time.
Petrou: Thank you.
Comments
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From Big Rapids, MI, 09/10/2008
Gee, it's getting to the point that we won't have anything to say against Russia or Chavez.
From CA, 09/09/2008
Hi - has there been any discussion at all about the billions of dollars that are made each time a company tanks by people who are short the stock, or who own "put" options? It is so much easier, nowadays, for large-scale players to take a company's stock price from, say, $40 to zero than it is to take it from $40 to $80. Why try to improve a company when you can kill it so much more easily, and make more money doing so...? As far a F & F are concerned, when you listed the funds that had bought in in recent months, my questioning nature immediately led me to wonder who was on the other side of those purchase transactions? Will we ever know if some of those fund managers - rather than guessing that F & F would recover - in fact knew the companies were doomed, and used fund monies to get friends, family and anyone providing a substantial kickback into short positions that they knew were sure to pay off...? Thanks!
From Winston-Salem, NC, 09/09/2008
The saga of Freddie and Fannie is proof that "too big to fail" means "too big". What a shame that we (Congress) created this mess.
From Chicago, IL, 09/08/2008
This is an excerpt of a letter I am sending to Secretary of the Treasury Henry Paulsen and to U.S. Senator Christopher Dodd tomorrow, Septenber 9th.
I am happy for investors around the world who hold GSE issued mortgage bonds. They now know that the American government guarantees a price tag for their jumbo bundles of questionable mortgage securities.
Too bad I cannot be so happy about seeing the 2,000 preferred Freddie Mac securities I purchased only this past May wiped out to next to zero overnight.
Let me state I am not a mortgage bank, nor an international central bank, but an American individual whose overnight loss amounts to the yearly salary of a teacher or firefighter. I never defaulted on any mortgage payment, I never sold or bought fraudulent mortgages. I am a first-time investor.
I am also one of the “speculators” you and both Presidential candidates don’t to bail out. No worries here, since it is too late. The only shareholders who stuck around til the end, like me. misinterpreted the promises the Treasury made in July: Should Fannie and Freddie struggle to recapitalize, the government would step in and help, at most, appoint an independent regulator. As long as Freddie’s auctions of new debt securities worked, the government would take a “wait and see” attitude and so would investors like me, reinforced by my financial advisor who sold the shares to me.
Why? My quarterly dividends guaranteed needed, fixed income for a freelance writer like myself.\
Encouraged by the Federal Reserve’s July promise, we saw Freddie debt auctions going well and share prices up a bit.
Well, we learned Sunday we were wrong. Who knew Freddie employed Enron- style accounting tactics so long after the Enron experience should have put a permanent stop to them? Not me, the “Wall Street speculator” who helped keep Freddie liquid with my idealistic, patriotic and trusting investment in the GSE model.
What I would like to ask you is this: Is it really so fair to let Freddie and Fannie investors like me bear the full blow of the bailout?
Is it fair to announce the elimination of non-cumulative dividends on Sunday and see what reduced principal investors had left melt away Monday morning in the wake of the coup? Is it fair to not guarantee the share value we owned on Friday after the close of business?
Is it not cynical to maintain preferred shares have not been wiped out under conditions that make the likelihood of any gains virtually nil as long as Treasury has first dibs on all dividends of its Fannie and Freddie senior debt? Why not share, little by little, some of those gains with the shareholders who were pained by the Government takeover while other investors danced in the streets today.
Analysts now say taxpayers may not shoulder the burden of the bailout if the plan succeeds. As a preferred Freddie shareholder I know that I am already shouldering this burden at a very high price. The real speculators were those who shorted or sold Fannie and Freddie shares, not those who bought them and who wish they were in the shoes of the speculators today, like me
From seattle, WA, 09/08/2008
Why in all of your coverage of Freddie / Fanny and the mortgage "crisis" do you never talk about how high the price of housing is, relative to income? The reason that people are having problems paying their mortgage is because the median cost of a house is a much larger portion of median income than it was 10/20/30 years ago. Please note inflation has been less than 4% for the last decade, but the raise in housing prices has been over 15%. This happened primarily because of increases in the availability of credit. Freddie and Fanny are the conduit for that. Expensive housing is not good for an economy. Income is capped at 100%, that has to be divided into things such as food, housing, healthcare, taxes, clothing, fuel and miscellaneous consumption, oh, and that thing we don't do so well called savings. A society is never better off by spending more on any of our needs. The root of economic growth is in finding out low LITTLE we can spend on our needs. We are better off spending 10% of income on food, instead of 90%. The same goes for housing. We have just reached the point where housing prices have gotten so high relative to income, that people's budget no longer covers interest on a house loan. This is the real root of the crisis, and I would appreciate you at least mentioning it once in awhile.
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