Saturday, July 12, 2008

Freddie and Fannie are Still Kicking

The markets got it wrong. When Bernanke and Paulson said that there would be no more bail outs of investment banking and the institutions would be allowed to fail, they weren’t talking about Freddie and Fanny Mae. These two institutions produce a product, a little like GM or IBM. They are not banks. They are business-to-business conduits, who package loans, for investment consumption, with an implied government guarantee.

There is no arguing that both Government Sponsored Entities (GSE’s) are highly leveraged and could eventually fall into bankruptcy. Most of the stuff on their books is 80% first trust deed loans. So even if real estate falls off of a cliff to say 50% of original value, these two Companies still stand to get back 70 cents on the dollar in a worst case scenario. The only really bad loans are those from the last 5 years. They held my note for 18 years, so there is a lot of high quality paper in their portfolios. During the heyday, the most they could have been clipped for in California was 417K per loan. The 1.2 million dollar homes out here are down to 600k and dropping fast. Just who owns that paper is a mystery.

Unless I stand corrected, Freddie and Fannie sold packages of loans. They didn’t sell them as STRIPS, CDO’s or SIV’s. It’s easy to cull out the losers and cut your loses if you hold a group of mortgages. If the investment groups that bought from Freddie and Fannie can return a full package, I would expect them to be made whole. The buyer could however, take a bundle of loans and slice and dice it; at that point, it’s kind of hard to return part of an item. A majority of the crap floating around is stuff that the GSE’s wouldn’t or couldn’t touch.

The collapses that Bernanke and Paulson are talking about are the enterprises that have many investors and are probably under the FDIC umbrella. The new prime directive is “No institution is too big to fail.” The one stop shop banks that do everything are what I would consider prime fodder; Citigroup and Bank of America come to mind.

Someone holds all of this credit card debt. Who is the “Countrywide” of “Plastic Money?” You hear that the average credit card debt is $5,000 per household. How about $5,000 per card? How many cards would you like to have Sir? One for each house you own? Hmmm! “I am just shocked, shocked that they would have so many cards!” Casablanca here we go again!

The banks in this country are very tight lipped about their finances. All it takes is a rumor to start a bank run. IndyMax just bit the dust. Senator Charles Schumer D –NY sent a letter to regulators June 26 claiming IndyMax was a dog. It started a bank run that ended as expected. 4,000 people just lost their job here. Maybe one of our fine Senators from California can reciprocate the favor and send a letter to regulators about Citigroup (based in NY), it's barking like a dog. Here is a new word for the dictionary, Verb: schumer, to be schumered, “screwed over by a politician.” Don’t look for it in a Readers Digest vocabulary test just yet.

Some killer favorites that could ruin your investment day: Citigroup, Bank of America and across the pond UBS.


Anonymous said...


Start keeping a running total.

"Federal authorities estimated that the takeover of IndyMac, which had $32 billion in assets, would cost the FDIC $4 billion to $8 billion. Regulators said deposits of up to $100,000 were safe and insured by the FDIC. The agency's insurance fund has assets of about $52 billion". See,Article By Kathy M. Kristof and Andrea Chang, Los Angeles Times Staff Writers July 12, 2008

Anonymous said...
This comment has been removed by a blog administrator.
Anonymous said...

This above was from:

Chuck Ponzi said...


Get your own blog. I recommend:

Chuck Ponzi

Jim in San Marcos said...

Hi Anon 8:09

IndyMac also services about 187 billion dollars worth of loans. We are not talking CDO's or SIV's, We are talking paper that has title. So this takeover can be quite productive. They have title to the properties.

I'm Not POTUS said...

Hi Jim,

I think an important thing to watch for with IndyMAC is what kind of "Butterfly effect" these future failures will have with small businesses that depend on the reliable exchanges of funds in a monthly cycle well above FDIC limits.

As quoted from the FDIC website for IndyMac.

"Your checks will be processed as usual. All outstanding checks will be paid against your available insured balance(s) as if no change had occurred."

Anyone care to figure out how many small businesses write checks in excess of $100k in a day, week, month, year? What the heck will happen when a failure occurs at a bank with business clients?

Expect to see an explosion of Small Businesses opening sub $100k accounts all over the place. Good luck with auditing and reconciliation. I guess everyone at IndyMac can get jobs at all the CPA's flooded with all the extra paper-chasing work this will cause. YEAH a JOBS program!!!!!!!!

How many small businesses lack the time, resources or common sense to do this work???? How many employees and vendors will be holding bounced checks because of this?????

O.T. P.S.
Was that really Chucky D. or a trolling reposter? Chuck Ponzi, Chuck D has a great blog and a really "curt" temper. Lets avoid a flame war between the Chucks OK.

Tyrone said...

Lets avoid a flame war between the Chucks OK.

I didn't sense any flaming here. First, it doesn't make sense to repost a whole story--just provide the link. Second, I don't think Denninger would repost his stuff in comments at other blogs.

Jim in San Marcos said...

Hi I'm not Potus

I interpreted Chucks comment as some sarcasim on Denningers long post. That was Karl Denninger of "The Market Ticker"

Karl has a lot to say if you have some spare time to really read for a while. The trouble is the people that need to read it most don't have the time to read more than 5 sentences.

He has to be one hell of a typist.

I am shorting the market, and I avoided Fannie and Freddie. It smells too much like a baited trap. I could be wrong, but it seems like those two have a couple more years of life to live.

IndyMac was an appetizer, we are about to get the main course. And as Denninger pointed out, nobody is paying attention to what is happening up on the Hill.

Thank you for your comments

Jim in San Marcos said...

Hi Tyrone

I think that you are right. Denninger wouldn't post to another blog in the comments. I wasn't sure, his site was messed up yesterday afternoon. Every time I clicked on his site, my web browser would shut down. I must say it reads better on his site. I'm glad that it was one of his "shorter" posts.

Take care

Alain Wong said...

Fannie and Freddie are "well-capitalized." ;)

I'm Not POTUS said...

Hi Jim,

I've followed Karl's blog since last year. Great insight. I even tried posting with my wry wit, but got my head bitten off. I respect his opinion and also wish more people would get in on the useful information. I just get anxious when he gets all "Don Quixote" about asking the people to rise up to fix things. I hope he doesn't go the way of a Greek tragedy. I admire his unbounded faith in the people but I am more in the manner of Churchill, Americans always do the right thing....after exhausting all other possibilities.

Jim in San Marcos said...

Hi Im not Potus

I've used the Churchill quote once or twice. It has a ring of truth to it.

Each blog offers something different. I have a day job so Denninger gets only a minute or two. They must have had him in mind when they invented the scroll mouse.

I try to keep my stuff under a page and my wife rarely reads past the first paragraph. Being short and to the point is a courtesy to the reader.

You ought to write more I like your style. Your last post on the Pharside was January and it still rings true today.

Take care

Jim in San Marcos said...

Hi Alain

Nice pun. The "well" is the taxpayers checkbook.

Paulson a few hours ago made an unusual Sunday announcement that Freddie and Fannie are OK.

Nobody is going to sleep tonight.

Anonymous said...

Schumer is NOT responsible for the demise of IndyMac. It's stock had already dropped a ton during the past year. All he did was say "Hey, someone needs to look into this thing." And someone does need to look into Citigroup and Bank of America and Wachovia and WaMu. All these huge banks are insolvent. It's the opposite of the great depression where the banks that fell were all small and absorbed by the larger banks that were better off. Today it's the small banks that are safer and the large ones that gambled too much on the way up and in danger of collapse.

The Good Life said...

If you're going to blame Schumer for the failure of IndyMac, then you had better be prepared to tar and feather OC Renter and Rob Dawg for the future failure of WaMu!!!

Gotta point the stink finger at Republicans for doing the same thing you blame a Democrat for.

Jim in San Marcos said...

Hi Anon 10:24

I dissagree. IndyMac was not on the bad bank list.

You have to take a bank on faith, there is NO bank that can withstand a run. In 11 days depositers withdrew 1.3 billion just because of one Senator. Why do you think that the list of banks in trouble is not published?

Anybody in public office has to be careful of what they say. There is no bank that can pay cash to all depositers and still transact business. This was a cheap shot and 4,000 people are now unemployed.

Jim in San Marcos said...

Hi Good Life

Just like the movie.

I don't think anything us bloggers say, is going to move the investor. We are not reporting the News, we are speculating on the future. Any one that takes what we say for gospel ain't going to make it very far in life.

Politics had nothing to do with what I said. All I did was cut and paste Schumers name and title out of a news report.

I try my best to stay out of Politics. Once you are elected to office, you represent all of us, not just the party that got you elected.

Politics is about who to blame for this mess. I hope Congress can rise above that level, we are going to need both sides to solve our problems.

Thank you for your comments