How Much Trouble Is Fannie Mae in?

Felix Salmon writes:

Fannie Mae Datapoint of the Day - Finance Blog - Felix Salmon - Market Movers - Portfolio.com: Fannie Mae's credit default swaps are trading over 200bp, despite their implicit government guarantee. Writing protection at these levels seems like a no-brainer to me: even if there is an event of default, recovery is going to be very close to par, and you get all the insurance premiums in the mean time.

Unless, of course, the default happens very quickly--and you don't get many insurance premiums first. And that isn't going to happen--unless it is, and unless somebody knows something and wants to be your counterparty.

Me? I think it is time to make FNMA's government guarantee explicit, and use it to start buying up mortgages...

Comments

[nocountry]

It's unlikely that the spread on Fannie Mae CDS reflects perceived credit risk. Anyone can figure out that the feds are not going to let FNMA fail, especially not now. Rather, what is going on is that a bunch of hedge funds are deleveraging, which is driving the spreads out to ridiculous levels. A similar process is underway in the muni bond market (last I checked, AAA munis were yielding substantially more than treasuries).

Eventually these anomalies will go away, and the obvious arbitrage positions will make money. But the path to get there will be very bumpy, especially for those who put on levered positions.

[nocountry]

Also, Brad, the I believe the seller of protection always gets the insurance premium upfront, like selling a put option.

[James Moore]

Better - make it explicit and admit that there is no guarantee, there never was a guarantee, and there probably never will be a guarantee.

Speaking as someone who's currently renting (the only sensible decision for the last few years in Washington) - there is no way government will be able to inject large amounts of taxpayer money into this in any easy way. It's a fantastic way to earn vast amounts of voter hatred for no benefit.

People who are in over their heads need to move on to a different home. Shareholders of the institutions who funded these mortgages are going to take large losses, some institutions will cease to exist as going concerns, property prices will go down, and the market will adjust.

I wonder if there's a generational thing happening here? Foreclosure just isn't that big a deal any more. Yes, you need to move. But people move all the time. People get evicted from their homes every day of the month in every state of the Union. Painful, yes, but by no means is it the end of the world.

[christofay]

What Nocountry says is probably more accurate. The commercial/inflation banks and everybody else in that pigpen is deleveraging so anomalies are popping up. We should not confuse these events as lights in the sky portending that Jesus says we should bail out the over-leveraged. Let's wait a while longer and have a serious discussion what we should save, try to understand that we're not as strong, as brilliant or as rich as we believe, and if we do bail let's do it so after the medicine we're stronger.

The tail end of the Greenspan era which just happens to overlap with the Bush era we overstimulated and overeased but thought it was brilliant while it was happening.

The pickle that we are facing now is dealing with the consequences of the bubble rather than the bubble itself. Classic Greenspanism. But let's not take the Greenspan route this time, please

[christofay]

Perhaps we should take this opportunity in the Citigroup is bust cycle and just let it go. This is called letting markets work. Market inefficiencies with the heavy hand of the government created this situation.

[christofay]

Fannie Mae which recently couldn't prepare its financial results for a number of years is an example of a government that understands giving favors and benefits. While it didn't release its results, it was another example of non-regulation; it should have been delisted by the SEC.

While its losses, perhaps $8 bil, are spare change compared to our innovative bankers recent results, just why did it lose money? It has the benefit of borrowing lower than the competition.

Too big to fail and big enough to hover up a lot of other junk bonds at close to face value rather than market prices.

[vt codger]

A contrary POV if I may. (And yes, it's overstated, but why screw up a moderately useful organization trying to shore up dikes that have already failed?) FNMA's mission is something along the line of "tear down barriers, lower costs, and increase the opportunities for homeownership." At this time, the principle barrier to home ownership is the absurd cost of housing. That's fixing itself. If you ask me, the last thing FNMA should be doing is buying mortgages. The time for FNMA to return to the market is AFTER prices start to bottom out. And prospective homeowners will probably need it then. If the government feels that an agency is needed to bail out developers, financial con men, inept economists, dumb bankers, realtors et.al. should it not charter a Federal Scam Artists Protection Agency (FSAPA)?

[Neal]

From Bloomberg, yesterday:

(quote)

The widening spreads prompted speculation the government may step in to support securities guaranteed by Fannie Mae and Freddie Mac, said Tom di Galoma, head of U.S. Treasury trading in New York at Jefferies & Co., a brokerage for institutional investors. The Treasury Department said the rumor isn't true.

``The Fed can't really save the mortgage market,'' di Galoma said. ``As they keep cutting, mortgage rates aren't going lower.''

The spread of current-coupon fixed-rated securities guaranteed by Ginnie Mae against 10-year Treasuries has climbed 55 basis points this month to 205 basis points, also the highest since the 1980s, according to Bloomberg data. Debt guaranteed by Ginnie Mae is explicitly backed by the U.S. government, and based on loans already insured or guaranteed by its agencies. A basis point is 0.01 percentage point

(end quote)

It's infecting all markets, even the ones explicitly guaranteed by the full faith and credit(!!) of the US.

The unsustainable has been proven to be so again. Prices must fall. Imprudent borrowers and lenders must fall. Government back-stopping and concealment of loss and damge risk further damage due to international distrust of the US financial structures.

Otherwise, how are we different than a socialist government--like Castro (gasp!!)?

[baileyman]

The guarantee is like a business continuance policy, but it doesn't pay equity or debt holders. It can still go BK, but will continue operating.

[bakho]

Is insurance another example of privatization as a glorified way to transfer the revenue from a business without transferring the risks?

Why is it a good idea to subsidize middle men private corporations if both costs to the government and costs to the end user are increased? Why do we have private businesses involved in either student loans or mortgages? Is there any advantage other than a sweetheart political deal for campaign donors?

[Maynard Handley]

"Me? I think it is time to make FNMA's government guarantee explicit"

Great. So we start off giving people who buy houses a tax break. Now we give them cheaper financing.
And with what goal in mind?
- More people who own houses, and thus are less free to move around then renters --- with consequent pathologies of highway traffic jams and with some effect on the insane local schooling situation
- We make it that much easier for people to breed, with all the problems that is already causing and will cause in future.

How about we treat this crisis not as an excuse to do more of the same, but to fundamentally restructure housing policy towards something that actually makes sense for the 21st century?