Bailout costs to date for Financials - $900 billion

[Sikon]

I'm opposed to the amount being spent on these bailouts but just don't think people could make much sense of the federal budget if they thought something like this was a $0.9 trillion increase for the year.

[Sikon]

Here's an article from a couple months ago showing where a lot of this started:

[July 23rd, 2008]

WASHINGTON — The House on Wednesday approved compromise legislation to shore up mortgage giants Fannie Mae and Freddie Mac while helping hundreds of thousands of homeowners refinance into more affordable loans.

The measure now goes to the Senate, where some conservatives want to delay a final vote.

The 272-152 House vote came hours after President Bush dropped his threat to veto the measure unless Democrats eliminated a $4 billion fund to help local governments buy and redevelop foreclosed homes. [...]

Democrats backed the bill, but most Republicans broke with the White House, calling the measure a bailout that forces taxpayers to back Fannie Mae and Freddie Mac and their $5 trillion portfolio.

Rep. Jeb Hensarling, R-Texas, called the firms — which have protected their interests via hefty campaign contributions — "financial Frankensteins that now threaten to gobble up their creators."

Financial Services Committee Chairman Barney Frank, D-Mass., said the bill was vital to shore up the housing market and toughen oversight of the two firms. He called the internal GOP spat a classic case "where the right hand does not know what the far-right hand is doing."

The non-partisan Congressional Budget Office says that the new Treasury powers could cost $25 billion, but that there is a more than 50% chance Treasury might not have to intervene, and an outside risk of a $100 billion price tag.

From here

[Gerald Tarrant]

On Topic: $900 billion dollars? Like, $900 000 000 000? Holy fucking shit. What is the effect this is going to have on the US dollar's value? I'm curious how this kind of spending has on the currency's value.

It's a tricky question. If Fannie and Freddie had been allowed to fail it's likely the dollar would have taken a major hit. There are rumors that Chinese finance ministers queried Secretary Paulson as to the guarantees of Fannie and Freddie's debt before investing some of their sovereign wealth funds in them. If the rumor's true then letting Fannie and Freddie fail would have reflected badly on the "full faith and credit" of the US which would have hurt the currency. That's 2-300 billion of the financial bailout probably well spent considering no one has ever contradicted the implicit backing of Freddie and Fannie, and the alternative would call in to question America's willingness to pay its obligations.

As to the rest of the money spent? It's still thorny. The current situation is reminiscent of Japan's financial meltdown. Japanese banks were flush with cash due to the government pushing for low interest rates. The banks made some bad calls, and the Japanese government guaranteed the bad debt. Net effect, Japanese growth since the 90's has been anemic. Parallels between the current US situation and the Japanese situation are obvious.

How does this affect the US currency? At heart it's a supply/demand problem. If people want US goods there's a demand for US dollars, if Americans buy goods from abroad there's a supply of US dollars. Normally, if supply is higher than demand we'd expect the dollars value to fall. There's an additional wrinkle, investing excess dollars in forming US capital (stocks, extending credit, whatever) offsets the excess supply. So anything which affects the potential value of US stocks or debt has an impact on the dollar's strength. In this case if investors think this matter is put to rest than the $900b extended won't hurt the dollar's value too much, if it looks this meltdown will continue then the dollar should continue to slide.

[J]

It's a tricky question. If Fannie and Freddie had been allowed to fail it's likely the dollar would have taken a major hit. There are rumors that Chinese finance ministers queried Secretary Paulson as to the guarantees of Fannie and Freddie's debt before investing some of their sovereign wealth funds in them. If the rumor's true then letting Fannie and Freddie fail would have reflected badly on the "full faith and credit" of the US which would have hurt the currency. That's 2-300 billion of the financial bailout probably well spent considering no one has ever contradicted the implicit backing of Freddie and Fannie, and the alternative would call in to question America's willingness to pay its obligations.

Except there's one problem. None of Freddie & Fannie's debt or any other investment vehicles has a government guarantee of any sort, implied or otherwise. It says on the cover page of the Prospectus in large bold capitals letters. There is no government obligation, period, to cover any bonds or other debt offerings from F & F. None at all.



The Chinese and everyone else buying these investments know full well that they're not guaranteed by the US government, they bought them because they wanted a higher yield over government Treasuries. They got greedy, they almost got wiped out and through some serious arm-twisting they managed to shove the bill onto the US taxpayers instead of eating their losses.

[Gerald Tarrant]

Except that Fannie and Freddie have never been treated that way. They've always been able to borrow below market rates. The reason? They were deemed as less risky of collapse because of the implicit government support. Meaning they pay a smaller to non-existent risk premium. The congressional charter of Fannie and Freddie let them play by different rules, lower cash reserves being the most telling,

Two of the largest positions in the portfolio--Fannie Mae and Freddie
Mac--produced below-Index results for the year due to the controversy
surrounding their operations as Government Sponsored Enterprises (GSEs). Both
companies are stockholder-owned, but operate under Congressional charter to
promote home ownership by ensuring the adequate flow of money into the mortgage
lending market. The controversy stems from two separate issues. The first is the
implicit subsidy these entities receive in the form of lower borrowing costs,
which results from widespread belief that the federal government will stand
behind the obligations of its GSEs. Many analysts question how much of the
subsidy the GSEs capture and how much they pass on to homeowners. The second
issue involves determining the best regulatory framework necessary to ensure the
safety and soundness of these very large institutions. While these issues are
important, we believe that the controversy distracts investors' attention away
from the real risk to any leveraged financial institution--declining asset
quality. On that issue, we believe Fannie and Freddie have done a great job of
keeping losses low in their mortgage portfolios. We have chosen to hold these
currently controversial companies because we believe they are very good
businesses. Their efficient operations and implicit subsidy create "a big fat
gap" (Fed Chairman Alan Greenspan's accurate, albeit inelegant, description)
between borrowing costs and portfolio income that, in our view, translates into
high profitability. And they are cheap; both companies sell at about ten times
this year's earnings, barely more than half the multiple of the S&P 500.

SEC filings for some mutual fund

Fannie and Freddie were allowed a lower Capital/asset ratio than other financial institutions, they're exempt from this thingLink

In any case here's what the CBO had to say on the subject of Freddie and Fannie's government backing

there have been no federal appropriations for cash payments or guarantee subsidies. But in the place of federal funds the government provides considerable unpriced benefits to the enterprises... Government-sponsored enterprises are costly to the government and taxpayers... the benefit is currently worth $6.5 billion annually.

Link

[ArmorPierce]

It's a tricky question. If Fannie and Freddie had been allowed to fail it's likely the dollar would have taken a major hit. There are rumors that Chinese finance ministers queried Secretary Paulson as to the guarantees of Fannie and Freddie's debt before investing some of their sovereign wealth funds in them. If the rumor's true then letting Fannie and Freddie fail would have reflected badly on the "full faith and credit" of the US which would have hurt the currency. That's 2-300 billion of the financial bailout probably well spent considering no one has ever contradicted the implicit backing of Freddie and Fannie, and the alternative would call in to question America's willingness to pay its obligations.

Except there's one problem. None of Freddie & Fannie's debt or any other investment vehicles has a government guarantee of any sort, implied or otherwise. It says on the cover page of the Prospectus in large bold capitals letters. There is no government obligation, period, to cover any bonds or other debt offerings from F & F. None at all.



The Chinese and everyone else buying these investments know full well that they're not guaranteed by the US government, they bought them because they wanted a higher yield over government Treasuries. They got greedy, they almost got wiped out and through some serious arm-twisting they managed to shove the bill onto the US taxpayers instead of eating their losses.

It may have not been stated but any finance book that you read will state that there is an implicity government guarantee that the government will not allow fannie mae and freddie mac to go under.

[J]

There's an implicit guarantee on the US government keeping Freddie & Fannie solvent.

However, there is absolutely nothing stating that the US government will make good on Freddie & Fannie's bonds and other investments. In fact, the Prospectus itself explicitly states there is no government backing nor obligation at all, period. And it says so in plain blunt language.

The US government can keep F & F solvent, that's fine. However, they can tell all the bond holders to perform an illicit sex act with a cow and there's nothing the bond holders can do about it. It doesn't matter how good their lawyers are, there is no possible way they can win and reclaim their money; they will be, and should be forcibly sodomized by the US government.

[Stark]

Holy shit, it's ACTUALLY called 'Fannie Mae'? That's not just some concatenation or familiar term? That's fucking hilariuos.

Anyway, with the debt being paid from the public purse, is this an argument for more regulation, or less regulation and more education?

[CaptainZoidberg]

I remember for a debate in High School about increasing the size of the public debt, I took all of the public debt as % GDP figures from the CIA World Factbook and calculated the linear coefficient of correlation.

I don't remember exactly what it was, but it was very, very small. Meaning that nations with more debt were really no more likely to have weaker economies than nations with less public debt.

That said, it would be interesting to run some numbers and see if large amounts of public debt has a correlation to having a weaker economy, say, 10 years down the line.

[Uraniun235]

Holy shit, it's ACTUALLY called 'Fannie Mae'? That's not just some concatenation or familiar term? That's fucking hilariuos.

Anyway, with the debt being paid from the public purse, is this an argument for more regulation, or less regulation and more education?

There is absolutely a need for more regulation, because this whole mess in large part basically came out of the fact that in the financial world the people who played more risks tended to win more money, and the people who were more conservative didn't quite win as big, so the wiser and more conservative people were passed over for promotion in favor of the risk-takers; rinse and repeat until by the end the whole fucking operation is basically being run by the guys who are prone to betting the house on Black 13. (paraphrased from someone/somewhere else)


Yeah, one could say "well, if we had more financial education, people would know they couldn't get something for nothing", but in my opinion that's borderline Roddenberry-esque faith in the goodness of humanity. Even if we had a mandatory comprehensive Finance curriculum in all public high schools, I'd be willing to bet a good chunk of the people who got into zero-down ARMs would still have done so because the mortgage brokers who sold them on it would still have been able to bamboozle them with "yeah but housing prices only ever go up so eventually you'll make money no matter what". Education only goes so far against a personality which is susceptible to sufficiently sleazy salesmanship, and especially against a person who wants to believe they can get something for nothing.

[Uraniun235]

GHETTO EDIT: "...in the financial world the people who played more risks tended to win more money in the short term..."

Another big aspect is the very narrow focus on short-term profits.

[phongn]

Holy shit, it's ACTUALLY called 'Fannie Mae'? That's not just some concatenation or familiar term? That's fucking hilariuos.

It's real name is the Federal National Mortgage Association (FNMA), but everyone calls these GSEs by their familiar names.