Comments on: Another day, another stunning bail out.

By: sandrar

sandrar — Thu, 10 Sep 2009 19:06:35 +0000

Hi! I was surfing and found your blog post… nice! I love your blog. Cheers! Sandra. R.

By: Tony Makara

Tony Makara — Tue, 09 Sep 2008 22:53:39 +0000

Adam, sorry I missed your reply. What I mean is that 'we' that is all of us, need to ask lenders to show a bit more decorum when deciding whether to grant credit to specific individuals, we also need to do more to educate people against borrowing on the value of their home. I should like to see a form of personal finance taught in our schools as part of the curriculum, so that young people leave school with a grounding in how finance works. As David Cameron was pointing out earlier in the year, credit/debt isn't a bad thing as such, it can be a great help to people, the problems occur when a person is unable to manage debt, this is where we much change the culture, so that people understand how money can work for them rather than against them.

By: Blank Xavier

Blank Xavier — Tue, 09 Sep 2008 19:37:38 +0000

Spreads are now at 68.8bps – they went up 5 points yesterday.

This may then be the rough settled value – in which case the Treasury is looking at (wild guess time) about 32 billion USD total cost for Fannie Mae. Maybe another 15 or so for Freddie Mac, call it 50 billion in total.

By: figurewizard

figurewizard — Tue, 09 Sep 2008 19:04:20 +0000

The rescue of Freddie Mac and Fannie Mae was inevitable as their collapse would have precipitated a global financial disaster. However the problem we are all now faced with is how we stop this from ever happening again. Like our own little local difficulty with Northern Rock, it appears that it was not the lack of regulations that was the problem it was that the regulators utterly failed to take action in good time. Whether or not those responsible in the US are taken to task remains to be seen but the fact is that none of the guilty parties here in the UK have been made to answer for their own failures.

By: adam

adam — Tue, 09 Sep 2008 18:07:01 +0000

Your implication is we need some state regulation of who can own a house. Thats how im reading it.

"When you say we need to look at the culture of home ownership," what are you implying?

By: Kevin Lohse

Kevin Lohse — Tue, 09 Sep 2008 10:57:52 +0000

Blank Xavier on 09 Sep 2008 at 7:33 am
Thanks. I was very vague about the workings of FM&FM. Anyone out there who can cast further light?

By: Blank Xavier

Blank Xavier — Tue, 09 Sep 2008 07:33:06 +0000

> In these cases there was no run on the institutions forcing the
> hand of the authorities."

I may be wrong, but I suspect this is not true.

Fannie earns about 10 billion a year – at 30bps spread. At 130bps that 10 billion drops to about zero. Expected losses over trend on their book – well, that's the big unknown. Something approaching 100 billion maybe. Fannie needs all of it's earnings for the next couple of years to manage its losses. If spreads remain at 130, they have *no earning power* which leads them to be profoundly insolvent.

The longer Fannie has to issue debt at 130bps, the more the Fed will have to pay off in debt repayment. So the Treasury has a choice; wait with fingers crossed and hope spreads drop back to 30bps (which hadn't happened and wasn't going to happen) or get in there ASAP to minimize losses. Debt is issued at a high rate – a couple of billion dollars a quarter – so this is a lot of money.

As it is, spreads have only tightened to about 90bps. The Treasury may be going to lose a *lot* more money than it bargained for – presumably is they were assuming spreads would drop back to 30bps or so and mean they could use earning power to neutralise losses.

The problem may be that it's all very well providing a bailout, but people *still do not know the scale of losses to be expected at Frannie*. The quality of the loan book is still unquantifiable. So having a bailout – you still don't know where you stand if you buy their debt – you still *don't know* how much risk you're taking – and how can you assume the Treasury will really back up their full bailout when you know *they* don't know how much it's going to cost.

By: Tony Makara

Tony Makara — Mon, 08 Sep 2008 15:34:45 +0000

Adam, show me where I said its wrong to aspire to home ownership? I said perhaps it is beyond the financial means of some people. I feel a lot of people have taken on debt beyond what they can control, their intentions were good but not based on a rational assessment of their finances. There certainly is now a media culture that promotes home ownership, but with a view to buying, renovating and selling on properties at inflated prices, the culture is no longer about simply owning a home to live in. Many people have been seduced by this culture.

By: adam

adam — Mon, 08 Sep 2008 14:52:48 +0000

That was a reply to Tony Makara

By: adam

adam — Mon, 08 Sep 2008 14:50:22 +0000

I really disgagree with your posts.

What is wrong with the aspiration to own a home.
In any case not everyone does, many people rent, especially migrants.

Overreaction to events is a hallmark of the hysterical left, in my experience.