Fannie Mae & Freddie Mac - the big bailout?

[chaos]

They're talking about securities held by investment firms, not actually bailing out consumers. I'm not certain about there being a market on student loans, I do know that there is a larger market on private student loans than I had thought. I just read an article about how the credit crunch is affecting private student loan lenders, and how some students are having their loans canceled due to lack of funds ont eh part of the lender.

[Lleauaric~EW]

Originally Posted by Snugglebear

When you have ICBMs, nobody tells you to fuck off, and you don't go bankrupt.

Riddle me this.

What happens when people all over the world decide that the USA is no longer a good credit risk? When it becomes clear that people aren't going to be able to back the money loaned to them.

Thats right.

Credit disappears in the US. There is no longer any money to finance things. Not just that 60 inch plasma. Highways, buildings, capital.
Gone.

Credit is investment. For this long the rest of the world has looked at the US and said "Oh they are good for it", and have invested here. Those days may quickly be coming to an end. Money will be flowing to other places, places where people havent been sucked dry, those places will have free and easy credit.
The middle class in this country will disappear as we know it as we become a cash society.
You wont be able to get a mortgage, or a school loan, or a car loan, or a credit card for a reasonable rate. There will still be credit..... for the rich.

Hey at least our mailboxes wont be filled with offers for a few years.

[Arbitrary]

Nothing would make me a happier on this Earth than to see us sink that low.

[Zippygoose]

Originally Posted by prescient63

Enron was marking to market differently though. Enron was marking their profits today to their expected profits tomorrow. For example they buy a barrel of oil today at open at $50 the price of oil falls to $49 close, so technically at the end of they day they should show a 2% loss. What enron would do, and this passed the SEC's scrutiny at the time, was to mark their gains today because they expected oil to be $55 4 months from now. So as far as their books were concerned they made a 10% gain today even though they really lost 2%.

Just to expand on this, another thing they would do would be to take mark to market even further by placing cash values on internal IP. For example, someone at Enron would say something like-"hey! what if we went into the space business! It would be totally awesome! 20 years from now I bet we'd make $500 million dollars profit per year on it! YEAH SPACE AWESOME!-Mark us down for $500 million in profit for today!". An extreme example, but you get the idea.

Interesting documentary on Enron well worth viewing imo:

"Independent Lens" Enron: The Smartest Guys in the Room (2005)

Edit: This is also a watch instantly movie on netflix btw.

[chaos]

It's only by hitting bottom that we can truly be free.

Last major investment banks change status - Yahoo! News

Just saw that. So this will allow them to take cash deposits. I have to wonder how much that will actually help. Maybe this is a more long term move, but in the short term it doesn't seem to me like people are going to be jumping over themselves to change banks, especially not to a failing investment bank that just had it's status changed.

[Lleauaric~EW]

Its like this:



but in really slow motion. The records don't disappear, just nobody pays them.

[Soriak]

A pretty rough article, but well worth reading: How We Became the United States of France - TIME

Now our laissez-faire (hey, a French word) regulation-averse Administration has made France's only Socialist president, Francois Mitterand, look like Adam Smith by comparison.

Haha... the whole article is a great read.

[prescient63]

Originally Posted by chaos

It's only by hitting bottom that we can truly be free.

Last major investment banks change status - Yahoo! News

Just saw that. So this will allow them to take cash deposits. I have to wonder how much that will actually help. Maybe this is a more long term move, but in the short term it doesn't seem to me like people are going to be jumping over themselves to change banks, especially not to a failing investment bank that just had it's status changed.

GS already had 150 billion in deposits through subsidiaries, and something like 75% percent of the forbes 400 are their clients. MS is selling a 20% stake to one of the largest banks in the world allowing them access to their deposits. So I think this will make a big difference in their business model and Wall St's opinion that they will have viable business models going forward.

[Leto Eu`Acumen]

A Question:


Bad Paper vs Equity. I've been trying to get my head around this whole situation for a week, and I am confused about something....

Ok, so largely the problem is banks holding 'bad paper' i.e., assets that have been marked way down in value that are still on the books. So say for example a company has a group of assets that have been marked down 50% - now the government suggests with the bailout that we buy those marked down assets at the discounted rate taking that 'bad paper' off the books and hoping that the bad assets can be managed in such a way that we eventually get to offload them at a greater price than we paid for them (which is why folks sometimes say we could actually make money on this).

But if banks are selling their bad assets at marked-down values, how does that not completely screw over the balance sheets of the banks? If those bad assets marked down to 50% value eventually go up to (just for example) 80% or even better, that would largely alleviate the problem (I realize the reality of the situation isn't going to allow that in the near-term)....BUT my point being isn't selling those assets at marked-down value just locking in that bad value for the banks?

Their problem is that they have assets in significant enough volume that have been marked down that it is dramatically effecting the bottom line of the company as a whole - it seems to me that selling those assets AT their reduced rates just locks them into the problem they are in rather than solving it.


OR am I just misunderstanding the whole situation and the US Government is trying to buy assets that have been marked way down in value at a rate much higher than they are currently valued at, which is why folks on Wall Street would be happy about the deal?

It seems to me that what those banks etc need is an infusion in actual equity capital, rather than selling bad paper at severely marked down rates.

I am sure I am way, way over-simplifying it, but there is something here I am not understanding. Right now the bailout as I understand it doesn't make a great deal of sense as far as solving the problem goes.

[Eomer]

But if banks are selling their bad assets at marked-down values, how does that not completely screw over the balance sheets of the banks? If those bad assets marked down to 50% value eventually go up to (just for example) 80% or even better, that would largely alleviate the problem (I realize the reality of the situation isn't going to allow that in the near-term)....BUT my point being isn't selling those assets at marked-down value just locking in that bad value for the banks?

My understanding is that all this ABCP shit has already been marked down. To zero. That's why so many banks have had huge issues the past little while. There's no market for this stuff, and so according to accounting practices they had to mark it all down as a giant zero.

So if they sell it for 10% of it's original value to the government, hypothetically, it's a gain for them because for the time being it's essentially worthless.

So the government will buy up all this ABCP at bargain bin prices because nobody else wants it. As far as what they do with the ABCP I have no idea, but from what I understand the main problem with it isn't that it's entirely useless, it's that they don't know how much of it is good or bad and that'll take awhile to shake out. But potentially once things settle it might turn out to be a net gain for the government.

Feel free to make fun of me if I completely misunderstand what's going on.

[Soriak]

The problem is that it's pretty much impossible to put a value on the paper they're holding. There's no real market for them anymore (nobody is brave/stupid enough to buy them) and without a market to establish a price, everyone is lost. In some cases, those papers have to be accounted for as worthless, so banks want to get them off their balance sheets in return for some treasury bonds that they can value at face value. That would prop up their balance sheets, leading to huge gains even if they sold the crappy paper for a loss. That being said, I don't think the government will get through this without taking some losses as well.

[Leto Eu`Acumen]

Thanks fellas, that makes more sense.

I'm sure it won't be the last time I have a question about this stuff heh.

[prescient63]

That's a little to simplified. Lets look at a company like AIG. Was AIG insolvent? No. The problem was that AIG had massive amounts of credit default swaps. A credit default swap basically says that a 3rd party such as AIG will, for a price, assume the risk of another party. Part of the deal is that AIG will have to maintain a certain amount of liquidity, a certain amount of assets, and a certain credit rating. If AIG does not maintain those things I can make a collateral call and AIG essentially has to pay me for not holding up their end of the deal. As I make collateral calls and AIG has to pay me, the assets on their balance sheet are also dwindling in value. Those CDS aren't worth so much anymore, and they have cash outflows which hurts thier credit rating (basically their ability to make payments). The lower their credit rating the more collateral calls and the more they have to unload assets at below market prices. It's a nasty circle and it is why all those companies were looking for capital infusions. There is also the issue that the lower your stock price falls the harder it is to raise capital. Due to all of these issues you can't hold these assets and hope they regain their value without capital infusions.

Lehman specifically wanted to hold their assets, and it ended up costing them. They could have found a merger 6 months ago.

Edit: My explanation is a little too simplified but thats all I have time for and you should get the gist of it.

[Itzena]

Has this been seen in this thread yet?

[Gurgeh]

Crude is skyrocketing, I'm reading +25% in one day ? wtf ?