Economic and market consequences of FNM/FRE bailout

Quote from KeithOmalley:

they have 5 trillion of debt. but at the highest estimates the delinquincy rate is only 1%, so that would be 500 billion dollars of possible debt. or about 3x the stimilus package we just had. 5 trillion number is silly. i don't think 100% of all houses will defalt on there house.

usa debt is about 9.5 trillion $$. but our economy gdp is 14 trillion, and growing faster then our debt. most nations have a higher debt/gdp ratio then us. japan is 194%. the uk, France Germany and Canda all have a higher debt ratio then us.

SO it would not be a big deal
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I'll respond line by line.

"they have 5 trillion of debt" - IF their accounts are accurate. Given their recent history of accounting lies, it's possible the figure is even higher.

"at the highest estimates the delinquency rate is 1%" - that's the current rates. Obviously the relevant figure is peak default rates in the future, for example in mid 2009 or 2010 during the depths of a potential real estate depression.

"5 trillion number is silly. i don't think 100% of all houses will defalt on there house." You are confusing the debt level with the default rate. It's basic accounting - if you owe X then you owe X, your chance of default has *nothing* to do with how much you owe.

"usa debt is about 9.5 trillion $$. but our economy gdp is 14 trillion, and growing faster then our debt"

The US budget deficit is forecast at about $400 billion - about 2.9% of GDP. Do you really think the US economy is growing at 2.9% right now?

"the uk, France Germany and Canda all have a higher debt ratio then us."

The UK has a far lower debt ratio than the US - 43% versus 61%. The other 3 have a slightly higher one now, but a FNM/FRE bailout would give the US a ratio of almost 100%, putting them way beyond the other 3 you mention. The US would then have a similar ratio to countries like Italy.
 
"our economy gdp is 14 trillion"

I would seriously question this figure as being somewhere between overstated or grossly over stated.

One look at the offical growth, employment and inflation figures plus a passing glance at reality tells us that these figures are manipulated.
So why would we expect the economy at 14T to be any different

regards
f9
 
Quote from Cutten:

The Fed is effectively part of the government, hence I disagree the government had nothing to do with it.
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The FED is 100% owned and controlled by the banks, not by the government. Also check the quote from Poole:

Reuters: Mortgage lenders Fannie Mae (FNM) and Freddie Mac (FRE) are "insolvent" and may need a U.S. government bailout, former St. Louis Federal Reserve President William Poole was quoted as saying in an interview with Bloomberg.

"Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer," Poole was quoted as saying in an interview held on Wednesday
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FED's Poole is talking about the government = congress, which is NOT the FED. Therefore, it's not the FED's money. It's a HUGE difference. The FED is allowed to print its own money, the government isn't. If the government is going to bail them out, it has to lend the money from the FED. In that case, the FED makes money, the government pays for it. Big difference.
 
Quote from Cutten:

I'll respond line by line.

"they have 5 trillion of debt" - IF their accounts are accurate. Given their recent history of accounting lies, it's possible the figure is even higher.

thank god they had accounting issues, or they would have made much more loans in the past, and a bigger issues now. and the accounting issues where to pad earings if i remember. so i think it would be difficult to hide more then a few billion, not trillion

"at the highest estimates the delinquency rate is 1%" - that's the current rates. Obviously the relevant figure is peak default rates in the future, for example in mid 2009 or 2010 during the depths of a potential real estate depression.

ok lets use 2% then, but still only 1 in 500 houses are in forclosure right now, i dont think that number is going to go to 10 in 500 anytime soon

"5 trillion number is silly. i don't think 100% of all houses will defalt on there house." You are confusing the debt level with the default rate. It's basic accounting - if you owe X then you owe X, your chance of default has *nothing* to do with how much you owe.

...why does fre and fnm have a AAA rating now? because of the implied backing. so mco and mhp figure the usa govt owe ths money anyway or will pay it back

"usa debt is about 9.5 trillion $$. but our economy gdp is 14 trillion, and growing faster then our debt"

The US budget deficit is forecast at about $400 billion - about 2.9% of GDP. Do you really think the US economy is growing at 2.9% right now?

Yes i actually do. did you take economics 101? the number we usually see if REAL GDP which takes out inflation. so with inflation at 4% and even really bad growth 1% we are still growthing at 6% at 2% real gdp growth, we are growing at 7%. hell if inflation is at 6% next year and real growth is at 2% now we are killing it. :)

"the uk, France Germany and Canda all have a higher debt ratio then us."

The UK has a far lower debt ratio than the US - 43% versus 61%. The other 3 have a slightly higher one now, but a FNM/FRE bailout would give the US a ratio of almost 100%, putting them way beyond the other 3 you mention. The US would then have a similar ratio to countries like Italy.

it was late but this is the chat i took the figures from. http://en.wikipedia.org/wiki/List_of_countries_by_public_debt
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:D :D
 
Quote from Cutten:


So if the US govt bails them out, that is potentially $5 trillion on the national debt - at least in a strict accounting sense.
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Of course GAAP wont apply to the government, thats only for the dishonest CEOs
They might argue that they 'can remove the guarantee at any time' like on medicare benefits or 'housing still to uncertain losses could be very small' or 'fnm and fre have a lot of claims paying resources we might not even lose anything' and of course moodys and the s&p will get calls from the treasury everyweek saying 'you know are you sure you want to do this, are you'. whatever happens as a consequence I think it will take a long time to play out, its trader's nature to think their predictions will come true tomorrow
 
Quote from Daal:

Of course GAAP wont apply to the government, thats only for the dishonest CEOs
They might argue that they 'can remove the guarantee at any time' like on medicare benefits or 'housing still to uncertain losses could be very small' or 'fnm and fre have a lot of claims paying resources we might not even lose anything' and of course moodys and the s&p will get calls from the treasury everyweek saying 'you know are you sure you want to do this, are you'. whatever happens as a consequence I think it will take a long time to play out, its trader's nature to think their predictions will come true tomorrow
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Well stated. How often have all of us been right but too early on macro calls.
 
@ Cutten:

If the FED would bail them out, the us gvt debt wouldnt increase. If the US gvt would bail them out, it would have to lend the money from the FED and the us gvt debt WOULD increase. So that's why I said that it's a 'huge difference'.
 
Quote from Cutten:

I'll respond line by line.

"they have 5 trillion of debt" - IF their accounts are accurate. Given their recent history of accounting lies, it's possible the figure is even higher.

"at the highest estimates the delinquency rate is 1%" - that's the current rates. Obviously the relevant figure is peak default rates in the future, for example in mid 2009 or 2010 during the depths of a potential real estate depression.

"5 trillion number is silly. i don't think 100% of all houses will defalt on there house." You are confusing the debt level with the default rate. It's basic accounting - if you owe X then you owe X, your chance of default has *nothing* to do with how much you owe.

"usa debt is about 9.5 trillion $$. but our economy gdp is 14 trillion, and growing faster then our debt"

The US budget deficit is forecast at about $400 billion - about 2.9% of GDP. Do you really think the US economy is growing at 2.9% right now?

"the uk, France Germany and Canda all have a higher debt ratio then us."

The UK has a far lower debt ratio than the US - 43% versus 61%. The other 3 have a slightly higher one now, but a FNM/FRE bailout would give the US a ratio of almost 100%, putting them way beyond the other 3 you mention. The US would then have a similar ratio to countries like Italy.
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i responded already, but my reply got included in your responce


thank god they had accounting issues, or they would have made much more loans in the past, and a bigger issues now. and the accounting issues where to pad earings if i remember. so i think it would be difficult to hide more then a few billion, not trillion

ok lets use 2% then, but still only 1 in 500 houses are in forclosure right now, i dont think that number is going to go to 10 in 500 anytime soon

...why does fre and fnm have a AAA rating now? because of the implied backing. so mco and mhp figure the usa govt owe ths money anyway or will pay it back .

The US budget deficit is forecast at about $400 billion - about 2.9% of GDP. Do you really think the US economy is growing at 2.9% right now?

Yes i actually do. did you take economics 101? the number we usually see if REAL GDP which takes out inflation. so with inflation at 4% and even really bad growth 1% we are still growthing at 6% at 2% real gdp growth, we are growing at 7%. hell if inflation is at 6% next year and real growth is at 2% now we are killing it.

GDP, or Gross Domestic Product is the value of all the goods and services produced in a country. The Nominal Gross Domestic Product measures the value of all the goods and services produced expressed in current prices. On the other hand, Real Gross Domestic Product measures the value of all the goods and services produced expressed in the prices of some base year.

it was late but this is the chat i took the figures from. all the countries i used are above the usa.

http://en.wikipedia.org/wiki/List_o..._by_public_debt

Everyone on ET is all doom and gloom. yes there are issues but again its not the end of the world, and no the usa will not be downgraded or even put on downgrade watch. Bush hates FNM and FRE. this is more political then it is an actual issue.
 
Inflation is running north of 10% using 1980's era CPI.

Inflation at 4%? Where'd you get that?? The Beauru of Labor Statistics??! lol.

Inflation is nowhere near 4%.

And GDP is nowhere near 6%. :D

We're in stagflationary recession. The worst kind.


Cutten -- despite rampant US inflation, i doubt a bond sell-off will happen anytime soon. Look at the past 3 years since recession/oil boom onset. Bonds are still high. Way too high, given real inflation. So what gives? Risk-adjusted return given the copious amounts of dollars, euros, and yen sloshing around.

Investors are willing to take a Real Loss on TIPS for a guarenteed (return) than a big hit on indexed or funds.

I agree with your line of thought. Fundamentally, bonds and T-bills will ultimately correct. But a FredFan bailout won't do it. We're talking maybe a trillion max. Which is undoubtedly huge. But how much has the Fed already kicked-in ? Close to a Trillion over the past 18 months, if not more... Yet bonds are still high. No sign of inflation there...

Soverign wealth funds are still tied to US economic health for their own. They're not about to slit their own throat with a plummeting USD index. It doesn't serve their interests.

The interesting part about all this - US Treasury and FED know this. They're taking every pegged Country for the ride of a lifetime. America built these economies through massive trade deficits. Now they're all F* you. What are you gonna do???! We're the biggest Game in Town. So those banana republics go along to get along. And before the Blow-hards pipe up with the 'yea! f* em!' type stuff. The American People are on the hook for a big chunk of that devaluation. Of course, the Fed knows this. FED policy is to finance the War in Iraq (trillions) without an economic slowdown. Thats accomplished through dollarization or loose credit. Even Trichet won't raise anymore. EURO-land is under increasing labor pressure to cheap foreign imports. All currencies have to move within a tight band of the USD or somebody gets royally screwed.

Went off on a bit of a tagent there.

At the least, I'd wait until soverign wealth show their cards and actually dump T-bills prior to building a position. Theres a lot of tough talk going around about China and the Middle East unpegging. But nobody has the balls or automous strength to pull the trigger. Its all talk at this point..
 
Quote from luckybastard:

The FED is 100% owned and controlled by the banks, not by the government. Also check the quote from Poole:
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I'm aware of the structure of the Fed. The fact is, they are chartered by the government, pay dividends to the treasury, are granted a monopoly on legal tender, and are ultimately (in the event they bust out) backed by the taxpayer. They are a government institution in everything except appearance.
 
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