The Big Picture

Here Comes the Half Trillion Dollar Fannie/Freddie Bailout!

Posted by Barry Ritholtz on Friday, September 05, 2008 | 07:53 PM

A series of high-level meetings between Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson, and the chief executives of Fannie Mae (FNM) and Freddie Mac (FRE), along with the companies' new regulator, the Federal Housing Finance Agency took place today.

Rumors of the meetings had obviously leaked out earlier in the day, as the Financials and Homebuilders ramped up into the afternoon. Beazer Homes gained +8%, and Lennar popped 8.5%, despite the 4 million plus homes in inventory.

The announcement is more likely to be modest -- $35-50 Billion dollars -- but that is a mere bandaid. Once the initial bolt is shot, it will be back to the well, over and over again. $5 to 6 Trillion move back on to Uncle Sam's balance sheet, plus whatever losses that accrued from buying the bum mortgages -- figure a few $100 billion. (Hey, it must be nice to be Pimco!)

As to the crappy derivatives that Phony and Fraudy bought when they thought of themselves as giant hedge funds -- the first person in government that suggests taxpayer money be used to cover those losses, I will personally feed into a wood chipper . . . Feet first . . . Slowly.

Bloomberg reported some of the rumored details:

"The Treasury Department is close to finalizing a plan to help shore up mortgage giants Fannie Mae and Freddie Mac, according to people familiar with the matter. Precise details of Treasury's plan couldn't be learned. The plan is expected to involve a creative use of Treasury's new authority to make a capital injection into the beleaguered giants. The plan includes changes to senior management at both companies, according to a person familiar with the plans. An announcement could come as early as this weekend. Treasury Secretary Henry Paulson met with regulators and executives of Fannie Mae and Freddie Mac today amid speculation the Bush administration is near completing a plan for an injection of government funds in the companies. Paulson gathered with Federal Reserve Chairman Ben S. Bernanke, Fannie Mae Chief Executive Officer Daniel Mudd, Freddie Mac CEO Richard Syron and Federal Housing Finance Agency director James Lockhart in Washington. Mudd and his aides have also been meeting at the FHFA, which oversees the two firms, with catered food scheduled for delivery at the agency through the weekend."

I suspect this will be another hugely expensive and ultimately unsuccessful attempt to bailout our prior irresponsible profligacy. Ultimately, we pay for this through 1) the massive printing of more dollars; 2) some corresponding form of hyper inflation; and 3) the kindness of not strangers but our overseas overlords.

That's right -- we have no money for rebuilding our infrastructure, for any form of National Heath Care, for fixing/saving social security, but a bunch of rogue traders and Alan Greenspan, under the guise of "Deregulation" can leverage up and lose trillions, which you the taxpayer is on the hook for!

Free market my arse!

~~~

Here are your weekend questions:

How much is this going to cost the taxpayer?

Is this anything more than a temporary band aid?

Does this do anything for the Housing Market? For other Financials?

What is the political fall out from this?

What say ye?

Sources:
U.S. Near Deal on Fannie, Freddie
Options Include Injecting Capital in Mortgage Giants; Management Shakeup Coming
By DEBORAH SOLOMON and DAMIAN PALETTA
WSJ, September 6, 2008
http://online.wsj.com/article/SB122064650145404781.html

Paulson Meets With Bernanke, Fannie Mae, Freddie Mac Chiefs
By John Brinsley and Dawn Kopecki
Bloomberg, Sept. 5 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=ax0ft0S9hVYk&

Recession Yet?

Posted by Barry Ritholtz on Friday, September 05, 2008 | 04:00 PM

in Data Analysis | Economy

Funny comic from Ted Rall (who is usually too far over the top for my taste)

Paul Volcker: Finance System is 'Broken'

Posted by Barry Ritholtz on Friday, September 05, 2008 | 03:34 PM

in Credit | Derivatives | Federal Reserve

"This bright new system, this practice in the United States, this practice in the United Kingdom and elsewhere, has broken down. Growth in the economy in this decade will be the slowest of any decade since the Great Depression, right in the middle of all this financial innovation. It is the most complicated financial crisis I have ever experienced, and I have experienced a few...

Changes are going to have to be made'' to the global financial system."

-Paul Volcker, former Federal Reserve Chair, 1979-87

>

Straight talk from the best former Fed Chairman alive:

Former Federal Reserve Chairman Paul Volcker said the U.S. financial system, dependent upon securitization rather than traditional bank loans, is broken, and may contribute to the weakest expansion since the 1930s...

The former Fed chief projected "a lot'' more losses from the collapse in the mortgage-backed debt market, after the more than $500 billion tallied so far, should the U.S., European and Japanese economies fail to pick up. He urged changes in financial regulations, echoing calls among sitting officials and legislators...

Volcker's comments came after a government report today showed the U.S. unemployment rate rose to a five-year high as the economy lost more jobs than forecast in August. The report underscored concerns that U.S. consumer spending will weaken and push the American economy into a recession.

Fed Chairman Ben S. Bernanke said on Aug. 22 that financial turmoil has "not yet subsided,'' and is contributing to weaker growth and higher unemployment. Policy makers will "continue to review'' the Fed's measures to ensure liquidity to determine "if they are having their intended effects,'' Bernanke said.

Banks three decades ago accounted for about 60 percent of U.S. credit; that later declined to about 30 percent as securitization -- where financial firms package assets into bonds and other instruments and sell them on to investors and other companies -- spread.

I don't expect to hear such talk from anyone currently associated with the Fed, but its still refreshing to hear blunt honest talk occasionally . . .

Source:
Volcker Says Finance System `Broken,' Losses May Rise
Doug Alexander and Steve Matthews
Bloomberg, Sept. 5 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=auKCKTSSU7yE&

Media Appearance: Bloomberg TV (09/05/08)

Posted by Barry Ritholtz on Friday, September 05, 2008 | 01:45 PM

in Media

Bloomberg_logo_rect

I'll be on Bloomberg television at 2pm, discussing the weakening economy, today's Employment data, and yesterday's big 344 point whackage.

Should be fun!

What Up With Pimco?

Posted by Barry Ritholtz on Friday, September 05, 2008 | 12:00 PM

in Bailouts | Credit | Fixed Income/Interest Rates | Investing

WTF is up with PIMCO ?

Strange things are afoot at the biggest bond fund in the world. A weird sense of panic seems to be emanating from the West Coast fixed income specialists.

I suspect it may have something to do with with the fact they are loaded to the gills with paper from Fannie & Freddie (FNM & FRE) -- a trade that has worked out exceedingly well. Despite this -- or perhaps because of it -- the latest noise from the boys from Newport Beach is increasingly odd, even desperate sounding.

I do not know if they are genuinely terrified of a major meltdown in the global economy, or worried about their book. Maybe they are looking for an exit, and not finding one.

The WSJ noted about PIMCO:

The bond-management firm has posted good gains since the credit crunch began last year, in part by betting big on mortgage debt tied to Fannie Mae and Freddie Mac -- whose implicit government backing and relative safety compared with other securities has helped keep their bond returns in the black.

Now as both entities show continued financial weakness and many parts of the bond market remain pressured, a main challenge for Mr. El-Erian, 50 years old, will be sustaining Pimco's winning returns.

Then came the very strange commentary Bill Gross posted at the PIMCO site -- a weird, quasi-homage to Cramer, which then reiterated the expected pain of a deleveraging and asset liquidation.

Continue reading "What Up With Pimco?"

McCain Acceptance Speech Word Cloud

Posted by Barry Ritholtz on Friday, September 05, 2008 | 10:45 AM

in Politics | Web/Tech

Last week, we looked at Obama's acceptance speech via Wordle. As promised, here is the same treatment for McCain's speech.

click for a larger version:

NFP is . . . -84k!

Posted by Barry Ritholtz on Friday, September 05, 2008 | 08:30 AM

in Data Analysis | Economy | Employment

~~I'm out of pocket at 8:30am, so feel free to post comments about NFP and any related data . . .~~

Back in the Saddle, with a few quick notes and charts:

100k job loss! We now have had out 1st 100k month, in that the revisions for June brought the number from 51k to 100k even.

Unemployment Rate: now has a 6 handle on it -- 6.1% is the official number. Bureau of Labor Statistics Commissioner Keith Hall stated that while previous joblessness gains were concentrated among teens, last month "workers age 25 and over accounted for all of the increase in unemployment."

Temporary Help: Was off 1.5% from July to August, and down more than 9% from August 2007.

Household Survey: Over the past 12 months, the number of unemployed persons has increased by 2.2 million and the unemployment rate has risen by 1.4 percentage points, with most of the increase occurring over the past 4 months.

Real GDP: ISI noted that the recent level of continuing unemployment claims is consistent with a 1.0% Real GDP in 3Q. In light of this report and the recent revisions, I would guess that is optimistic.

Recession: William Poole, former president of the Federal Reserve Bank of St. Louis: "It certainly increases the probability that we really are in a recession. It is a weak number, including the revisions.''

Birth Death Adjustment: August 2007 = 102k; August 2008 = 125k -- There is an almost a reasonable explanation for this: B/D relies in some part on State incorporation filings. 100k people get laid off, and a big chunk of them start working for themselves as freelancers/independent contractors. They incorporate so they don't lose their house if the business goes belly up.

Hence, the more layoffs, the potentially greater B/D adjustments.

Monthly/Yearly Changes, NFP

chart courtesy of Barron's Econoday

NFP Yearly Changes, with B/D

chart courtesy of Jake at Econompic

Sources:
THE EMPLOYMENT SITUATION: AUGUST 2008
BLS, Septmber 5, 2008
http://www.bls.gov/news.release/empsit.nr0.htm

Will NFP Breach 100k ?

Posted by Barry Ritholtz on Friday, September 05, 2008 | 06:29 AM

in Data Analysis | Economy | Employment

The Bureau of Labor Statistics releases Nonfarm Payrolls this morning at 8:30. Consensus expectations are for Payrolls to drop by ~75,000, the eighth consecutive monthly decline. Barron's pegs the range of forecast on Wall Street from -150,000 to -60,000, with no economist forecasting a job gain.

Consensus for the Unemployment Rate is 5.8%, with a range from 5.5% to 5.9%, according to Bloomberg. ADP National Employment Report forecast that private employment decreased 33,000.

Two very interesting data points to note: The trend in Payrolls is now negative, not just for 8 consecutive months, but today's release is likely to be negative year over year. Secondly, aggregate hours worked has entered the red side of the year over year ledger two months ago.

Why are these data points important? Employment is a lagging indicator, and once it flips negative year over year, it tends to get worse, not better, over the ensuing year. Merrill Lynch's David Rosenberg observes:

Once the YoY trend in payrolls goes negative, it does not bounce back – it is the hallmark for a new trend that lasts more than a year; and at the trough reaches -1.5% to -2%. So, we have already seen 463,000 jobs cut so far this year, and the historical record would tell you that there is probably between another 1.5-2.0 million to go before the job market backdrop stabilizes.

One last data point worth noting: As the chart below shows, when employment data goes negative on a year over year basis, we get a recession 100% of the time:

Non Farm Payrolls, Year over Year changes (1935-2008)

chart courtesy of Merrill Lynch

And as that chart shows,we are still in the early stages of any employment downturn, as employment is a lagging indicator. Hence, hopes that the non-recession is all but over are most likely very premature.

Will today be the month when NFP crosses the 6 figure line? It certainly can be argued that but for the Birth Death adjustment, it already has. Given that layoffs are now at the highest levels since 2002, a 100k number is very possible. But any negative number will tip us into the red Y/Y -- with all the negatives associated with that.

Source:
Excess capacity being built up in the labor market
David Rosenberg
Merrill Lynch, 04 September 2008
https://www.gpcresearch.ml.wallst.com//common/emaillink/pdf.asp?SSS_709C99840B100D2683B0F3F1AF577D20&pdf=pdf/North_America_Morning_Market_M.pdf

Shiller: House Price Decline Could Be Worse than Depression

Posted by Barry Ritholtz on Friday, September 05, 2008 | 12:30 AM

in Economy | Real Estate | Video

Shiller's main points:

• Home price declines are already approaching those in the Great Depression, when they plunged 30% during the 1930s. With prices already down almost 20%, it's not a stretch to think we might exceed that drop this time around.

• There are about 10 million homeowners whose debt is higher than their home value, which has broad implications for how Americans feel about their wealth and spending habits (read: more pressure on consumer spending).

• The current hopeful consensus -- that house prices will bottom soon and then begin to recover -- is most likely a dream. Housing markets don't usually have "V-shaped" recoveries. And even if house prices stabilize in nominal terms, after adjusting for inflation, most homeowners will continue to lose money.

Source:
U.S. House Price Decline Could Be Worse than Great Depression, Economist Shiller Says
Henry Blodget
Yahoo Tech Ticker, Sep 04, 2008 01:36pm EDT
http://finance.yahoo.com/tech-ticker/article/53094/U.S.-House-Price-Decline-Could-Be-Worse-than-Great-Depression#