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333 comments on DrumBeat: August 9, 2007

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wstephens on August 9, 2007 - 10:15pm Permalink | Subthread | Parent | Comments top

NC,

The Federal Reserve is restricted and cannot buy private securities (mortgage debt). This is the job of Fannie Mae and Freddie Mac -- gov't "sponsored" enterprises (originally) to help finance mortgages and promote homeownership which the government wanted to promote. Later they were "privatized" into companies.

There was a "rumor" printed in the Financial Times recently that Fannie and Freddie are going to be authorized to buy sub-prime (which they currently don't). Offically, I think, Fannie and Freddie are "private", but hardly anyone in finance thinks that they would remain strictly "private" in a mortgage debacle. I think they have their own regulator (OFHEO is it?).

Anyhow, the government/politicians will step in once people are shown on TV getting booted out of homes, re-federalize Fannie and Freddie (turn them back into "Federal National Mortgage and Federal Home Loan or whatever they were called"), and buy sub-prime mortgages, and eat the losses -- that's what the government is for! -- the ultimate bag holder! (note to libertarians: this is where libertarian policies go astray).

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NC on August 9, 2007 - 11:21pm Permalink | Subthread | Parent | Comments top

Thanks for the reply.

So I take it the closer the entity is to owning mortgages (as opposed to originally providing funds to those entities) the more the Feds hands are tied. I can see that the liquidity crunch will "appear" at the level of mortgage holders and can spread in both directions - down to people owning houses and up to investers - faster than the Fed can intervene.

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wstephens on August 10, 2007 - 7:32am Permalink | Subthread | Parent | Comments top

"faster than the Fed can intervene"

...and faster than the politicians even.

Interestingly, as I've posted elsewhere, it appears that sub-prime CDO investments were sold primarily to European and Asian investors -- so that may be why more investment blow-ups are happening overseas (while only the creators / facilitators are having problems here in the US). The ECB is doing much more "stabilizing" right now than the Fed.

A funny anecdote recently is that a US hedge fund was suing a mortgage servicing bank for re-structuring delinquent loans in a portfolio of sub-primes (which is the bank's fiduciary responsibility) because the hedge fund was "short" the mortgages -- what this means is that the hedge fund, which already had a 90% profit on the short position, wanted the banks to default the loans so the hedgies could make more money. Can you image the trial? -- "We've made 90%, and the bank is preventing us from making more! Kick those squatters out!". Good luck with a jury on that one.

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souperman2 on August 10, 2007 - 10:22am Permalink | Subthread | Parent | Comments top

Well they just did;

Fed Adds $19 Billion in Funds by Buying Mortgage Debt (Update3)

http://www.bloomberg.com/apps/news?pid=20601087&sid=aZ.cxsJa71xg&refer=home

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Substrate on August 10, 2007 - 1:44pm Permalink | Subthread | Parent | Comments top

So the federal government, which is running a deficit (aka debt) is using debt money to buy debt money which was probably chasing after debt money to begin with. And this is supposed to make people feel better? Right.

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333 comments on DrumBeat: August 9, 2007

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