by Calculated Risk on 7/13/2008 01:18:00 AM

From The Times: US Treasury rescue for Fannie Mae and Freddie Mac

US TREASURY secretary Hank Paulson is working on plans to inject up to $15 billion of capital into Fannie Mae and Freddie Mac to stem the crisis at America’s biggest mortgage firms.
...
Under the terms of the proposed move, the US government would receive a new class of shares in exchange for the capital, which would be hugely dilutive to shareholders.
...
The capital injection would also see both lenders granted permission to use the Federal Reserve’s discount window - a short-term emergency funding source.
...
Some in Wall Street believe a rescue plan may be announced ahead of tomorrow’s US market opening to calm nerves and support the debt auction.

Note: I just got back from a great hike in the Sierras and I'm definitely a little tired. Wow, I knew the news would be exciting while I was gone (with breaking news on IndyMac, Fannie and Freddie). Thanks to Tanta and everyone who sent me emails.

If this story is accurate, this bailout will be announced Sunday evening or Monday morning. The Bear Stearns announcement was on a Sunday around 7PM ET, so I would expect a Sunday announcement this time too (if this is going to happen).

by Anonymous on 7/12/2008 03:49:00 PM

My somewhat tenuous attention was captured this morning by this little parenthetical in the NYT story on the IndyMac failure:

The bank, once part of the Countrywide Financial Corporation, is the first major bank to shut its doors since the mortgage crisis erupted more than a year ago. (IndyMac is not related to Fannie Mae and Freddie Mac, the big mortgage finance companies that alarmed the stock market this week.)

Are we worried that the public will think all Maes and Macs are the same? And whose reputation would be more endangered by this, IndyMac's or Freddie Mac's?

The ironies of history. Trivia buffs will know that once upon a time there were three "agencies": the Government National Mortgage Association, the Federal National Mortgage Association, and the Federal Home Loan Mortgage Corporation. It didn't take all that long for market participants to start coming up with pronunciations for the abbreviations GNMA (Ginnie Mae), FNMA (Fannie Mae), and FHLMC (Freddie Mac, which makes no sense whatsoever except that nobody liked "Filly Mac." I once overheard an old hand in the loan delivery department helpfully explaining to a new recruit how to remember the difference between Mornet (FNMA) and Midanet (FHLMC), the GSEs' pool delivery software systems. "It's easy to remember," she said. "Midanet has a 'd' in it, just like 'FHLMC.'"). Old farts whose favorite childhood treat was a box of Pixies will remember the old-time candy company Fannie May, whose name is said to have inspired the whole thing, probably in the throes of a major sugar rush.

Anyway, the players long ago accepted the nicknames to the extent of actually legally changing their names to Ginnie Mae, Fannie Mae, and Freddie Mac, which was great for those of us who had to type Assignments of Mortgage. At some point the student loan corporation climbed on board and we got Sallie Mae, plus the agricultural loan guarantor known as Farmer Mac. By the mid-80s, if you were a government agency or GSE involved in the secondary loan market, you were almost always a Mae or a Mac of some kind. The Federal Home Loan Bank Board never did accept "Freddie Bob," which some of us thought was unsporting but there it is.

This started a fashion for private companies to put a Mae or Mac in their names, signifying that they were major players in the secondary loan market, too. Independence Mortgage Corporation named itself IndyMac. There was Ginger Mae for dicey home equity loans in the great subprime boom of the 90s. ResMae just declared bankruptcy last year, but Charlie Mac (which pools credit union loans) is still functioning as far as I know.

I don't think any private loan buyer has named itself Mac or Mae since 1998 or thereabouts; in this last boom the new entrants, mostly REITs, gave themselves sparkling fresh names like New Century and Luminent and Novastar as if to maintain a light-year's distance from the old gold standard of the Maes and Macs.

And just when it might have been useful to shed the boom-era designer names and huddle up to a solid, staid, boring old Mae or Mac again, we've got the media worried that we won't be able to keep our failing Macs straight.

by Anonymous on 7/12/2008 08:48:00 AM

Which is not the name of a band but probably should be.

Via Big Picture, we find this at Bloomberg:

July 11 (Bloomberg) -- The Federal Reserve has not had any discussions with Fannie Mae and Freddie Mac about access to direct loans from the central bank, Fed spokeswoman Michelle Smith said.

``Federal Reserve officials are following the situation closely,'' Smith said in a telephone interview today. ``However, there have been no discussions'' with the companies ``about access to the discount window,'' she said.

This is what Reuters reported yesterday afternoon:

WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke told Freddie Mac chief Richard Syron that his company and Fannie Mae could take advantage of the emergency discount window, according to a source familiar with the conversation.

The source said that Bernanke and Syron spoke by phone Thursday afternoon and the central bank chief said in that call he intended the discount window to be opened if necessary to the two largest U.S. mortgage finance companies.

I got my first email on the subject Friday morning at 10:20 a.m., the burden of which was that opening the discount window was one of a number of proposals the Fed was "considering." I gather it took only a few hours for an anonymous source to have recollected overhearing a phone conversation between Bernanke and Syron on Thursday for Reuters that made it a done deal.

This morning, the Washington Post has managed to construct a narrative that makes it all true, you see:

Senior government officials prepared emergency steps yesterday to rescue troubled mortgage giants Fannie Mae and Freddie Mac but stopped short after a campaign of public statements eased immediate concerns about the stability of the institutions.

In this version, apparently, the Fed was ready to open the discount window but Hank Paulson's masterful calming of the waters yesterday made it unnecessary. I think. The Post story stops attributing its knowledge of Fed thinking and planning to any source rather early in the story, and having read it twice now I'm still not sure I exactly follow the bouncing ball. But it sure sounds better than saying the press credulously printed an unfounded rumor, doesn't it?

by Calculated Risk on 7/12/2008 08:00:00 AM

Note: I'm hiking in the Sierras, but I thought I'd leave some thoughts on employment. I'll be back Saturday night or Sunday morning.

I'm pessimistic on employment - I think problems in the labor market will linger - but I do not think unemployment will rise to 8% (a severe recession) during this economic downturn.

Note: just because unemployment doesn't rise to 8% doesn't mean many more people aren't hurting. Many people will probably be underemployed, and real wages (purchasing power) will decline for many employed Americans.

There are several reasons for my optimism (if you can call it that!). One of the reasons is the makeup of U.S. employment.

Click on graph for larger image in new window.

The first graph shows the year-over-year change in employment for manufacturing, construction, and everything else. Manufacturing and construction employment are more susceptible to large swings year-over-year, as these areas typically experience booms and busts.

It is reasonable to expect that construction employment will continue to decline significantly - perhaps another 1 million construction workers will lose their jobs as Commercial Real Estate (CRE) construction declines later this year and into 2009.

However manufacturing employment will probably only decline slowly for two reasons: 1) the weak dollar is helping with exports, and 2) manufacturing employment never recovered from the bust of a few years ago. So the decline in manufacturing employment will probably not be severe.

And these two volatile areas of employment make up much less of the total U.S. employment than during earlier recessions.

The second graph shows the percent of total U.S. non-farm workers employed in manufacturing and construction. Manufacturing employment has been declining steadily - and will probably continue to decline as a percent of total employment. The same percentage swing in manufacturing employment now will have a much smaller impact on total employment than during previous recessions.

Construction employment will probably decline sharply, but this only accounts for just over 5% of total employment.

The next most volatile area is retail sales employment, and the current downturn will probably see a significant decline in retail employment. And many service employees will be underemployed - and that is painful too.

But over all, total employment probably won't decline enough to cause unemployment to rise to 8%.

by Calculated Risk on 7/11/2008 10:00:00 PM

Hiking in the Sierras ...

by Anonymous on 7/11/2008 08:16:00 PM

Full press release here:

IndyMac Bank, F.S.B., Pasadena, CA, was closed today by the Office of Thrift Supervision. The Federal Deposit Insurance Corporation (FDIC) was named conservator. The FDIC will transfer insured deposits and substantially all the assets of IndyMac Bank, F.S.B., Pasadena, CA, to IndyMac Federal Bank, FSB. Brokered deposits will be held by the FDIC and those insured deposits will be paid off when the insurance determination is complete. IndyMac Bank, FSB had total assets of $32.01 billion and total deposits of $19.06 billion as of March 31, 2008. As conservator, the FDIC will operate IndyMac Federal Bank, FSB to maximize the value of the institution for a future sale and to maintain banking services in the communities formerly served by IndyMac Bank, F.S.B.

Insured depositors and borrowers will automatically become customers of IndyMac Federal, FSB and will continue to have uninterrupted customer service and access to their funds by ATM, debit cards and writing checks in the same manner as before. Depositors of IndyMac Federal Bank, FSB will have no access to on-line and phone banking services this weekend. These services will be operational again on Monday. Loan customers should continue making loan payments as usual.

by Calculated Risk on 7/11/2008 04:00:00 PM

It's Friday. Time to check with the FDIC.

Here is the FDIC Failed Bank List.

Please send any stories to Tanta.

by Anonymous on 7/11/2008 02:00:00 PM

I hate prepayment penalties and always have. In theory, they work just like an early withdrawal penalty on a certificate of deposit: you are paid a higher rate of interest in exchange for giving up liquidity for a stated period of time. In the case of mortgage loans, you are (presumably) offered a lower interest rate in exchange for giving up liquidity for a stated period of time.

In reality, few borrowers are, in my experience, capable of calculating the relative savings of the penalty loan accurately, or fully assessing the risk they take by accepting the penalty. This is without even getting into issues of predation or steering or failure to disclose adequately.

Case in point, from the Sacramento Bee:

When Carol Wallace sold her Sun City Roseville home two years ago, she got an expensive reminder from her lender.

She owed $5,964. Why? She had paid off her adjustable-rate mortgage early.

The lender offered to waive it, Wallace said, if she'd buy another house with one of their loans. But here was the point: She had cancer and didn't intend to buy again. She had to pay up.

Two years later, still ill, Wallace still fumes.

"It's written in my paperwork when I die to remind my kids," she said. "It says if there's a class action lawsuit, to remember me, to get my $6,000." . . .

Wallace said she knew she had a prepayment penalty. "But I didn't think it would be a problem because I didn't think I would have to move," she said.

Very few people, I suspect, make any decision about buying or financing a home, including but not limited to the prepayment penalty option, based on their fear that they might be diagnosed with a disabling disease in the next three years. We tend to think that people who obsess about very low-probability, very high-severity events are, well, obsessives.

Wallace was, unfortunately, the one it happened to. I suspect she thought--perhaps we all think--there should be some sort of "hardship exclusion" in her case. But there isn't one, and people sign these things all day without worrying that there isn't one. Perhaps they think to themselves, as Wallace did, that they would only move if they were forced to. By a hardship. Which isn't excluded.

And Wallace thinks she should be part of a "class action." I am trying to imagine how large a "class" of borrowers who suffered a very low-probability event would be.

I have myself come to the conclusion that prepayment penalties should be banned entirely. Not because Ms. Wallace's logic makes any sense to me, but because it doesn't make any sense to me but I suspect it does to most people with a prepayment penalty. And that is evidence enough that consumers cannot understand them.

by Anonymous on 7/11/2008 11:11:00 AM

This clears things up:

Secretary Henry M. Paulson Jr. made the following comment today on news stories about "contingency planning" at Treasury:

"Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission.

"We appreciate Congress' important efforts to complete legislation that will help promote confidence in these companies. We are maintaining a dialogue with regulators and with the companies. OFHEO will continue to work with the companies as they take the steps necessary to allow them to continue to perform their important public mission."

by Calculated Risk on 7/11/2008 10:00:00 AM

I'll be out of communication range today. Please send all stories to Tanta.

Thanks, Best to all, CR