Fannie and Freddie Bailout: 2008's Big Mistake Keeps Hurting

[Appaholic]

With the Dow back over 9000 and existing home sales up for three straight months, a lot of people are declaring the crisis over. But before looking too far forward, Charles Lemonides, chief investment officer at Valueworks, suggests investors and policymakers look back at the government bailout of Fannie Mae and Freddie Mac.
The rescue of Fannie and Freddie was the biggest mistake of 2008 for several reasons, Lemonides says:

- Fannie and Freddie were put into conservatorship in September 2008, hurting the credibility of policymakers like Hank Paulson, who had declared the GSEs to be solidly financed and solvent just weeks prior.
- While holders of Fannie and Freddie debt - notably many global central banks - were made whole by the government's actions, preferred shareholders were effectively wiped out.

"What happened at Freddie and Fannie took what were conditions that could make a financial panic and made a financial panic," says Lemonides
http://finance.yahoo.com/tech-ticker/ar ... et=&ccode=

[TwinTownBisonFan]

funny thing is, the TARP program was a runaway success... (i realize they are two somewhat different, albeit equally criticized programs) all of the federal investment was paid back, with interest earning something like 24% annualized rate of return... a huge success.

[AZGrizFan]

funny thing is, the TARP program was a runaway success... (i realize they are two somewhat different, albeit equally criticized programs) all of the federal investment was paid back, with interest earning something like 24% annualized rate of return... a huge success.

Has it all been paid back? I thought there were several banks who hadn't been able to pay it off yet.

This article is as of 6/9:

http://www.huffingtonpost.com/2009/06/0 ... 13065.html

More than 600 banks nationwide have received nearly $200 billion in TARP money and 22 smaller banks already have repaid it.

While I agree it's nice to earn 24%, I wouldn't judge the "success" or failure of this program until we see how much the government actually "earns"....

[AZGrizFan]

....and this, from the same article.

But some analysts warned that strong performance at the largest banks might obscure greater dangers in the broader banking industry.

Smaller banks are still saddled with billions of dollars in risky commercial real estate loans, which could cause heavy losses depending on the speed of economic recovery. And large banks continue to hold the toxic, mortgage-backed assets at the heart of the financial crisis.

Here's the ugly underbelly we don't see in the glowing income reports from the "big" banks.

[OL FU]

funny thing is, the TARP program was a runaway success... (i realize they are two somewhat different, albeit equally criticized programs) all of the federal investment was paid back, with interest earning something like 24% annualized rate of return... a huge success.

I don't think it is closed to being paid back and I am almost Certain FNMA hasn't paid back their portion.

The truth is most banks didn't need the money but took it at the behest of Paulson (orders from Paulson) so that the market wouldn't freak about the ones that needed it, Citi and BofA.


I understand why they did it, but creating an implicit government guaranty for the entities too large to fail is a horrible idea. It is exactly why FNMA was able to borrow so much debt. Every lender was 99.9% certain the government would make the loans good.

[TwinTownBisonFan]

i caught a piece on it on Marketplace last night saying that almost all of it has been paid back (my hunch is a lot of paying was done end of q2 or early q3) and that the tarp funds were being debated again over what to do with it

[AZGrizFan]

The TARP funds also came with restrictions such as limiting executive compensation. With those restrictions lifted, many major banks have begun to set aside more money for compensation.

Morgan Stanley set aside $3.88 billion for compensation during the second quarter, compared with $2.08 billion during the first quarter when it was still under TARP restrictions.

http://blog.taragana.com/n/morgan-stanl ... it-117210/

I need to get to the "for-profit" side of banking....

[OL FU]

i caught a piece on it on Marketplace last night saying that almost all of it has been paid back (my hunch is a lot of paying was done end of q2 or early q3) and that the tarp funds were being debated again over what to do with it

Was FNMA part of tarp. For some reason I thought it was prior to Tarp and the Fed put the money in. But my recollection isn't as good as it used to be.
And like I said alot of the Tarp money was to banks that didn't need it perse. Paulson wanted the perception to be a "shared" arrangement.

[OL FU]

http://bizfinance.about.com/b/2009/04/2 ... repaid.htm

The above is an article that states about half the $700B has been repaid. it is as of April. I think the big banks paid their's back recently and that is another $70B or so. There may have been more so yes it sounds like more than 50% and maybe a good deal more has been repaid.

[AZGrizFan]

i caught a piece on it on Marketplace last night saying that almost all of it has been paid back (my hunch is a lot of paying was done end of q2 or early q3) and that the tarp funds were being debated again over what to do with it

Was FNMA part of tarp. For some reason I thought it was prior to Tarp and the Fed put the money in. But my recollection isn't as good as it used to be.
And like I said alot of the Tarp money was to banks that didn't need it perse. Paulson wanted the perception to be a "shared" arrangement.

TARP was launched 10/14/08. FNMA and Freddie Mac were bailed out 9/6/08.

[OL FU]

http://www.marketwatch.com/story/treasu ... 0896163400

The announcement of the Fannie Bailout. I believe this was prior to TARP

[OL FU]

My biggest problem with TARP was not a conceptual one. Actually I have two problems. One is the way it was sold, do it fast without debate or the worlds ending. and then they didn't even use the money for what they said they would use for which was buying toxic assets.

The other problem and it is the problem with the way the Obama administration seems to be approaching banking reform and that it the concept of too big to fail. If a bank perceives itself as too big to fail then why not take excessive risks when you know the government is going to bail you out. Seems to me that encourages short term profits for bonuses as much as anything. I am not much for meddling but if a bank is too large to fail due to systemic risk, then their activites should be significantly regulated or they should be made to be smaller. I realize that larger banks have a place in our economy but most large loans are syndicated with other banks anyway.

Businesses that are perceived as too big to fail will find lower cost capital, take more risks and have significant competitive advantages over other banks.

[TwinTownBisonFan]

http://bizfinance.about.com/b/2009/04/2 ... repaid.htm

The above is an article that states about half the $700B has been repaid. it is as of April. I think the big banks paid their's back recently and that is another $70B or so. There may have been more so yes it sounds like more than 50% and maybe a good deal more has been repaid.

but that article is from april...

my point was that in the last two months a lot of it has come due and been paid off...

[TwinTownBisonFan]

My biggest problem with TARP was not a conceptual one. Actually I have two problems. One is the way it was sold, do it fast without debate or the worlds ending. and then they didn't even use the money for what they said they would use for which was buying toxic assets.

The other problem and it is the problem with the way the Obama administration seems to be approaching banking reform and that it the concept of too big to fail. If a bank perceives itself as too big to fail then why not take excessive risks when you know the government is going to bail you out. Seems to me that encourages short term profits for bonuses as much as anything. I am not much for meddling but if a bank is too large to fail due to systemic risk, then their activites should be significantly regulated or they should be made to be smaller. I realize that larger banks have a place in our economy but most large loans are syndicated with other banks anyway.

Businesses that are perceived as too big to fail will find lower cost capital, take more risks and have significant competitive advantages over other banks.

thing is, TARP didn't really exist for the banks... it existed to save average investors and customers. In the end I think it softened the crash landing and is hastening the onset of the recovery - it seems to have worked too. it's not perfect or flawless by any means...

[OL FU]

http://bizfinance.about.com/b/2009/04/2 ... repaid.htm

The above is an article that states about half the $700B has been repaid. it is as of April. I think the big banks paid their's back recently and that is another $70B or so. There may have been more so yes it sounds like more than 50% and maybe a good deal more has been repaid.

but that article is from april...

my point was that in the last two months a lot of it has come due and been paid off...

I think I said that when I posted the article. The article was from April and more money has come in

[OL FU]

My biggest problem with TARP was not a conceptual one. Actually I have two problems. One is the way it was sold, do it fast without debate or the worlds ending. and then they didn't even use the money for what they said they would use for which was buying toxic assets.

The other problem and it is the problem with the way the Obama administration seems to be approaching banking reform and that it the concept of too big to fail. If a bank perceives itself as too big to fail then why not take excessive risks when you know the government is going to bail you out. Seems to me that encourages short term profits for bonuses as much as anything. I am not much for meddling but if a bank is too large to fail due to systemic risk, then their activites should be significantly regulated or they should be made to be smaller. I realize that larger banks have a place in our economy but most large loans are syndicated with other banks anyway.

Businesses that are perceived as too big to fail will find lower cost capital, take more risks and have significant competitive advantages over other banks.

thing is, TARP didn't really exist for the banks... it existed to save average investors and customers. In the end I think it softened the crash landing and is hastening the onset of the recovery - it seems to have worked too. it's not perfect or flawless by any means...

It was to stop a possible collapse of the financial system. Lehman's bankruptcy had a much worse effect on the capital markets than Bernanke or Paulson suspected it would and that created panic in the two guys running the financial show. So from that prospective I suppose it was to save everyone. But the idea was to keep the banking system from collapse and then subsequently improve capital structures so they would lend. Customer were protected by FDIC.

As I said, I didn't have a problem with it conceptually. I had a problem with presentation and the potential end result of creating FNMA's in the banking system.

[TwinTownBisonFan]

but that article is from april...

my point was that in the last two months a lot of it has come due and been paid off...

I think I said that when I posted the article. The article was from April and more money has come in

my bad...

[OL FU]

I think I said that when I posted the article. The article was from April and more money has come in

my bad...

yeah I didn't want to come right out and say you were right and I was wrong