Saturday, September 6, 2008

Bailout Likely to be Announced Sunday

Good Afternoon!

Ok folks, I have spent the entire afternoon sorting through everything. The New York Times says one thing and the Washington Post says another. The differences between the two are described in a Bloomberg article. Here is the first Bloomberg story from today:

"The Washington Post reported that the government would make quarterly injections of funds as the companies' losses warranted, avoiding a large up-front taxpayer cost, citing sources it didn't name. Debt and preferred shares would be protected, and common stock would be diluted while not wiped out, the Post said.

The New York Times said most or all of both the common and preferred shares would be worth little or nothing"

Bloomberg Updated

There is a lot more updated and detailed info here so I will use this article to explain whats going on.

It looks like the CEO is out and analysts are speculating that all $5.2 trillion dollars will be guaranteed:

"Sept. 6 (Bloomberg) -- Treasury Secretary Henry Paulson will use his authority to rescue Fannie Mae and Freddie Mac, likely placing the beleaguered mortgage-finance companies under government control as early as this weekend.

Paulson informed House Financial Services Committee Chairman Barney Frank that the Treasury intends to use the powers that Congress provided last month to ensure the ``stable functioning'' of Fannie and Freddie, according to a statement today from the lawmaker. The government would make periodic injections of funds by buying either convertible preferred shares or warrants in the companies as needed, avoiding a large up-front taxpayer cost, according to a person briefed on the plan.

Holders of the companies' corporate debt and preferred shares would probably be protected, while the chief executive officers won't, said the person, who declined to be identified. Paulson met with Fannie Mae CEO Daniel Mudd and Freddie Mac CEO Richard Syron yesterday to tell them of the decision to put the companies into conservatorship, and remove the executives from their jobs, according to two people briefed on the discussions.

Shareholders' Fates

Analysts have speculated that the Treasury would wipe out common shareholders, while seeking to shield preferred stockowners from total loss. Fannie and Freddie preferred shares are typically owned by banks and insurance companies. Their $5.2 trillion of debt outstanding is held by investors including Asian central banks, and would probably be guaranteed, analysts said.

Mudd was accompanied in his meetings at FHFA yesterday by Fannie General Counsel Beth Wilkinson and Chairman Stephen Ashley. Last week, he shook up the company's management in an effort to restore investor confidence, replacing three top deputies."

My Take:

There is a lot to digest here. We still don't know what the details are so this is all pure speculation. It appears that this is going to be rolled out tomorrow before the Asian markets open. How dare they do this on the first day of football season!!!

Here is the key question: Will they just pump liquidity in as its needed and not guarantee the $5.2 trillion in debt or do they inject liquidity and guarantee the $5.2 trillion in trash?

If the $5.2 trillion gets the guaranteed, then the bond market is going to go apesh*t. Yields will go through the roof. Spreads on Fannie debt will narrow because its guaranteed. The government hopes this narrowing will lower mortgage rates and get housing moving again.

The problem the Treasury/government has here is the bond market is going to take long term rates higher because we will have just doubled our national debt overnight by taking over these two bloated pigs. They have no power to stop the bond market folks. ZERO, ZILCH,NADA.

Bottom Line

This is the best update I can give you right now. I will have much more insight tomorrow if they announce the details. I wouldn't want to be a Fannie/Freddie common shareholder right now. It looks like they get wiped out here.

I really don't have a clue as to how the market will take this. They tend to cheer bailouts so I wouldn't be surprised to see a bounce. If the bond market vigilantes send the 10 year to the moon then the bullish sentiment on Wall St. will be short lived.


Anonymous said...

Just tried to watch the announcement of the bailout. Right before they got to say what they were going to do both cnn and cnbc cut into it with their reporters trying to explain what it all means. Then they went on to talking about Sarah Palin. Thanks MSM!!

Jeff said...


I hate when that happens!

I bet you will be sick of hearing about it by monday. I bet uts everywhere