The Money Powers that own the US Government have shown they're committed to the Public Bailout of any Institution to which they're directly or indirectly invested. Although FreddyMac ain't worth squat, they hold massive amounts of junk CDO's (TRILLIONS), which, if hit the market in a receivership firesale, would deep six the already-teetering Financial/Investment Banking Sector. This was a 100% WallStreet Bailout. Make no mistake. Just because Goldman or BoA doesn't hold a major stake in Fanny or Fred, doesn't mean they wouldn't be affected by their blowup. On the contrary, most of Wallstreet's Brand Names would be pushed over the cliff in the ensuing liquidation. This bailout is another telling indicator that US CDO-holders will not be allowed to go under. Bernacke took junk paper from Banks and IB's at 100% face value convertible to US Treasuries. Rates slashed with inflation running hot. Treasury cut checks to faltering home owners. Endless money pumped into a failing system. Another reason medium-to-large publicly traded Financials cannot be allowed to go under - Credit Default Swap (CDS) exposure. Credit Default Swaps are basically insurance on Corporate Debt. Unfortunately, CDS became a speculative (read: highly leveraged) market unto themselves with no regulation on outstanding insured debt to REAL outstanding debt. What took place - outstanding insured Corporate debt is roughly 10 TIMES the actual outstanding debt, for any one Corporation. Fanny and Fred had over 1 Trillion in Corporate Debt between them. That means over 10 TRILLION in CDS insurance must be paid out from CDS Insurers to CDS buyers if FannieMac goes bankrupt and defaults on their long-term Corporate Debt. A lot of those CDS buyers are speculators. A lot of the CDS insurers are large cap institutions. That means a lot of LARGE CAP Corporations and funds - already struggling to stay afloat with their junk CDO's - would be on the hook for TRILLIONS in CDS insurance if a Bear or Fannie was allowed to go under. What happens then? Cascading dominoes: One goes down. Then 5. Then 25. Then a Depression with a horrendous market crash. What this means to us traders? It means Freddy May will never see 0$ per share. It will either be absorbed into a yet-to-be-created Government or Private entity (a la Bear Sterns absorbed by Morgan) to prevent CDS Trigger or will be infused with enough Tax Payer money to make it a viable Institution. That means 50 Cents a share is probably a good bet. It will never be allowed to hit zero folks. Its a buy. Now that we're talking about it, write (sell) CDS insurance on any big name financial company - be it a Citi, BoA, Wachovia, don't matter. Paulson will never let them fail = CDS payout will never get triggered = free money on the premium. Merry Christmas.
Sorry. Still worthless without a couple trillion capital infusion. Too leveraged. Yes, that's trillion, or 1000 billion dollars times two. I'd rather go to Mars with that money, personally.
I agree with just about everything you state. Can't they unwind this leverage over time. Oh shoot I forgot its another election year. More goverment screw ups. Will worry about the fall out in 2010.
If that's what it takes to keep them afloat, it'll happen. Guaranteed. The alternative is a total crash of the financial markets. Which do you suppose they prefer? Wallstreet owns the Fed. Wallstreet underwrote themselves Tens of TRILLIONS - if not HUNDREDS - in derivative exposure (CDS) that can NEVER BE HONORED without the total bankrupting of the Global Economy and huge amounts of wealth transferred mostly into small-time speculators and operators that bought CDS insurance. See where I'm going? When Paulson says Fannie is"to Big to Fail". He doesn't mean Fannie. He means the entire fuckin system. The overarching super-structure of Americas capital markets would come down if one major Corporation went under... Thats what all this is about. Wallstreet leveraged themselves trillions upon trillions in derivatives - options, if you like - and will not allow themselves to be caught on the short side. Its a joke. Biggest scam yet.
A real solution would first outlaw debt securitization beyond actual outstanding. That would take CDS derivatives out of the game. Second, make mortgage writers hold paper for 5 year minimum before disposition. That takes care of junk appraisers, raters, lenders and their worthless CDO product. In actuality, it wouldn't be such a bad thing if Fannie went under and the markets Collapsed. CDS buyers would be the new Kings and remake the financial world as they saw fit. Problem is that it will never happen. Why? Because the King Makers own the Federal Reserve System. The financial system was built upon a gigantic moral hazard. Wallstreet has no incentive to not take these wild, crazy-ass, hugely leveraged bets, because when they collectively do it together, there is no way they will lose. Because even if the bet goes South, they turn to the FED (whom they own through their parents and affiliates), and say, check please.
Wall Street the smartest bunch of idiots in the world. How can we make money, letâs steal deceive and lie, what a great business model. I'm sure they never have nightmares. I bet most of these crooks dread going to bed, ah the good feeling ones gets for doing the right things in life, good sleep can't beat it with a stick.
Guess what? Conservatorship is a trigger event. http://www.bloomberg.com/apps/news?pid=20601087&sid=ajsxbVS.W2lQ Fannie, Freddie Credit-Default Swaps May Be Settled (Update3) By Oliver Biggadike and Shannon D. Harrington More Photos/Details Sept. 8 (Bloomberg) -- Investors may be forced to settle contracts protecting more than $1.4 trillion of Fannie Mae and Freddie Mac bonds against default after the U.S. seized control of the companies in a bid to bolster the housing market. Thirteen ``major'' dealers of credit-default swaps agreed ``unanimously'' that the rescue constitutes a credit event triggering payment or delivery of the companies' bonds, the International Swaps and Derivatives Association said in a memo obtained by Bloomberg News today. Market makers for the privately traded contracts will discuss how to settle them in a conference call at 11 a.m. in New York, the document said. ``This is a big deal,'' said Sarah Percy-Dove, head of credit research at Colonial First State Global Asset Management in Sydney. ``The market is not experienced at settling a credit event for a name of this size, so it is a bit of an unknown.'' A settlement likely would be the largest in the market's decade-long history. Credit-default swaps on Fannie and Freddie have been among the most actively traded the past few months, according to reports from broker GFI Group Inc. Both companies also are among 125 companies in the benchmark Markit CDX North America Investment Grade Index, the most actively traded contract in credit markets, which investors use to speculate on corporate creditworthiness or to hedge against losses. Money Exchange The actual money exchanged may be limited, though, according to analysts at CreditSights Inc. Buyers of the contracts are paid face value in exchange for the underlying securities or the cash equivalent. ``If bonds rally and trade close to par, recovery could be close to 100 percent, with protection sellers having little to pay out despite a technical default,'' analysts Richard Hofmann and Adam Steer wrote in a note to clients. Dealers today were quoting the CDX index contracts both with and without Fannie and Freddie. Contracts with the companies dropped 11.5 basis points to 133.5 basis points, according to broker Phoenix Partners Group. Contracts without the companies were trading about 2.5 basis points tighter, Phoenix prices show. A Fannie and Freddie credit event also would be the biggest test to date of a process by which the market settles most contracts without an actual exchange of the securities. Under that process, dealers hold an auction to determine a recovery value for the securities, which is then used by investors to settle the contracts. CEOs Ousted Treasury Secretary Henry Paulson and Federal Housing Finance Agency Director James Lockhart yesterday placed Freddie and Fannie in a government-operated conservatorship, ousting their chief executives and eliminating their dividends. The Treasury may purchase up to $200 billion of stock in the firms to keep them solvent. Today's conference call will determine whether enough dealers agree the Treasury's action constitutes a credit event, Louise Marshall, spokeswoman for ISDA, said in a phone interview from New York today. ``We believe conservatorship is a credit event,'' Barclays Plc analysts Vince Breitenbach and Jeff Meli said in a note to clients yesterday. Barclays is a member of the ISDA. U.S. default protection costs as measured by the Markit CDX North America Investment Grade Index will also decline, they said. A basis point, or 0.01 percentage point, is worth $1,000 on a swap that protects $10 million of debt. Default Protection Costs Five-year contracts on Fannie Mae notes fell from a record high of 364 basis points on Aug. 20 and closed on Sept. 5 at 233, CMA Datavision prices show. The cost is equivalent to $233,000 annually to protect $10 million in notes from default. ISDA, which sets standards for the global derivatives market and counts investment banks including Deutsche Bank AG and Lehman Brothers Holdings Inc. as members, will arrange any settlement of the default swaps, spokeswoman Marshall said. She declined to name any participants on today's call. ``Although the settlement effort will be massive, we do not see it as necessarily a negative,'' Gus Medeiros, credit analyst at Deutsche Bank in Sydney, wrote today in a research note. ``Write downs are potentially an issue for holders of preferred equity, but the Treasury said financial institutions exposed to these securities will work with regulators to restore capital positions.'' Treasury Control Under the U.S. plan, the Treasury will get $1 billion of senior preferred stock in coming days, with warrants representing ownership stakes of 79.9 percent of Fannie Mae and Freddie Mac. The government will receive annual interest of 10 percent on its stake. While common stockholders of Fannie and Freddie won't be eliminated, they will be last in line for any claims, Paulson said yesterday. Preferred shareholders will be second in absorbing losses, he said. Interest and principal payments will continue to be made on the companies' subordinated debt.
This still doesn't qualify as a bankruptcy = zero bond value = massive CDS payout. Which underscores why these companies are bailed out/taken over to begin with. If Government Backstops any bank, mortgage house or lender 100% - even if the company is technically worthless - bonds will trade close to par = no huge CDS payout.
There has been speculation that one of the intended effects of the Paulson bailout was to unwind the CDSs in an orderly fashion.
Thats what I'm saying.... Think about it like this. If either went bankrupt, there'd be ten trillion outstanding on worthless bonds. This way, Government props up both entities, guarantees cash flow ad infinum, bonds don't tank and retain close to par value on expectation of future Government help. This way, even though its a "Technical" trigger, the actual payout is a tiny fraction of what it should have been if they went bankrupt with no bailout. In the later case, it would have been a true bankruptcy, bonds at 0 and CDS payout = 10 Trillion. Thats why I'm saying the Government will pull this again and again for any Big League Financial or Lender. CDS payout alone would devastate the market. They won't let the market or industry crash, so they'll keep on backstopping underwater companies. CDS writing is still a good bet. Collect roughly 2.5% in premium, per year.