Freddie Mac Asks For More Bailout Money!

Hallelujah!

On CNN Money: Freddie Mac needs another $10.6 billion

• NEW YORK (CNNMoney.com) -- Freddie Mac on Wednesday requested another $10.6 billion handout from the federal government....

I puked!

Holy cow!

• ... Freddie has already received $50.7 billion from the Treasury Department. Fannie Mae has so far gotten $76.2 billion...

Bloody hell!

This just says how bad it is, yes?

From Freddie website..

• McLean, VA – Freddie Mac (NYSE:FRE) today reported a net loss of $6.7 billion for the quarter ended March 31, 2010, compared to a net loss of $6.5 billion for the quarter ended December 31, 2009. After dividend payments of $1.3 billion on its senior preferred stock to Treasury, Freddie Mac reported a net loss attributable to common stockholders of $8.0 billion, or $2.45 per diluted common share, for the first quarter of 2010, compared to a net loss attributable to common stockholders of $7.8 billion, or $2.39 per diluted common share, for the fourth quarter of 2009.
  
  On January 1, 2010, Freddie Mac adopted new accounting standards related to transfers of financial assets and consolidation of variable interest entities (VIEs) (consolidation of VIEs). As these changes in accounting principles were applied prospectively, the results of operations for the quarter ended March 31, 2010 are not directly comparable with the results of operations for prior periods, which reflect the accounting standards in effect during those periods.
  
  The company had a net worth deficit of $10.5 billion at March 31, 2010, compared to positive net worth of $4.4 billion at December 31, 2009. This net worth deficit was primarily driven by a significant net decrease in total equity (deficit) of $11.7 billion due to the adverse impact of the consolidation of VIEs. The decline in net worth also resulted from the first quarter 2010 net loss of $6.7 billion and the dividend payment of $1.3 billion to Treasury on the senior preferred stock, partially offset by a $4.8 billion decrease in unrealized losses recorded in AOCI, primarily due to improved values on the company’s available-for-sale securities.
  
  “Throughout the first quarter of 2010, Freddie Mac continued to focus on strengthening underwriting and improving credit quality,” said Freddie Mac Chief Executive Officer Charles E. Haldeman, Jr. “At the same time, we helped more than 440,000 families own or rent a home, and more than 71,000 avoid foreclosure. In this difficult economic environment, the stability that Freddie Mac brings to the mortgage market is especially vital.... ( source: http://www.freddiemac.com/news/archives/investors/2010/2010er-1q10.html )

Duh!

This is exactly how vital Freddie is. It simply cannot survive without handouts!

Praise the capital markets for Freddie, ya!

Warren Buffett Approves Bailout of Freddie And Fannie

Posted on CNBC.

• "I wouldn't change anything in the plan myself," Buffett said in an interview on CNBC. He said he expects this step will go a long way in calming the market and resolving the ambiguity surrounding the two companies.
  
  "It's best deal and the most sensible deal available now," he said. "Now, you can argue that there should have been some different rules put in decades ago, and it wouldn't have come to this."
  
  "If Bear Stearns was an 8.5 on the financial Richter scale, this was about a 9.9, or something of the sort," Buffett said. "The government really had no choice but to do something. And then the question is: did they do the most sensible thing, and they did do that." Buffett said.

Source: http://www.cnbc.com/id/26605258

Jim Rogers says that US is More Communist Than China

Wow!

Jim Rogers is certainly NOT impressed with the bailout of Freddie And Fannie.

• US Is "More Communist than China": Jim Rogers
  
  The nationalization of Fannie Mae and Freddie Mac shows that the U.S. is "more communist than China right now" but its brand of socialism is meant only for the rich, investor Jim Rogers, CEO of Rogers Holdings, told CNBC Europe on Monday.
  
  "America is more communist than China is right now. You can see that this is welfare of the rich, it is socialism for the rich… it's just bailing out financial institutions," Rogers said.
  
  Stock markets jumped after the U.S. government's decision to launch what could be its biggest federal bailout ever, in a bid to support the housing market and ward off more global financial market turbulence.
  
  But Rogers said in the long term the move spelled trouble.
  
  "This is madness, this is insanity, they have more than doubled the American national debt in one weekend for a bunch of crooks and incompetents. I'm not quite sure why I or anybody else should be paying for this," Rogers told "Squawk Box Europe."
  
  European stocks soared on Monday, led by banks. UBS was up 11 percent, BNP Paribas up 8 percent, Credit Agricole up 11.1 percent and HBOS up 13.8 percent.
  
  "You certainly gonna see a huge jump in any financial institutions which owned a lot of Fannie or Freddie … because they don't have to worry about going bankrupt all of a sudden," Rogers said.
  
  "Bank stocks around the world are going through the roof, that's 'cause they've all been bailed out. You don't see the homeowners in Kansas going through the roof 'cause they're not being bailed out," he added.
  
  "A Huge Mess"
  
  However, despite the rally in Asian and European markets, the decision to take over Fannie and Freddie is likely to cause more volatility and needs careful consideration by investors, according to Rogers.
  
  It's rarely good to jump in a moving bus and right now you got a lot of buses moving. I might short some more investment banks in the US, depending on how they rally over the next week, but other than that, I'll just sit and watch," he said.
  
  Rogers, who is short on U.S. bonds, said these are likely to fall while commodities may rally. The two government-sponsored enterprises don't have good loans on their books, because "everybody else took the good stuff and dumped the bad stuff onto Fannie and Freddie," he said.
  
  From 2010, Fannie and Freddie will have to shrink their portfolios by 10 percent a year until they reach $250 billion, to reduce the risk to the taxpayer, according to the Treasury plan. But this may put additional pressure on the housing market, Rogers said.
  
  "That's going to also ensure that house prices continue to go down. It's going to be harder and harder to get a mortgage."
  
  Investors should not pin their hopes on this year's presidential election for a solution to the problems, as none of the candidates is likely to find one, Rogers said.
  
  "This is a big huge mess and neither one of them has a clue what to do next year. It's going to be a mess."

Source: http://www.cnbc.com/id/26603489/

Market Reacting Postively to The Big Bailout Of Freddie & Fannie

It just has to happen.

And as stated on Saturday's posting, Bill Gross Massive Statement To The Feds, Inflation, Boone Pickens Latest View on Oil And Baltic Dry Index Keeps On Diving!

• But as far as Gross is concerned, if Fannie Mae , Freddie Mac, Citigroup and Merrill Lynch hold offerings to raise capital, Pimco will be sitting them out.
  
  This puts Henry Paulson and the Treasury Department in position to have to act. Washington has been holding on any kind of bailout, hoping that buyers like Gross will keep struggling banks afloat. But by refusing to take part, Gross, the biggest bond buyer in the world, is in effect calling the Treasury’s bluff.

And how Paulson and his team has reacted by seizing control of Freddie and Fannie. See Government Takes Control of Fannie, Freddie and Paulson's Full remarks. In my opinion, there was no alternative.

And the markets from Asia are now reacting positively on the news of the bailout. Asian Markets Soar 2% on Fannie, Freddie Bailout

Transcript Of Warren Buffett's Latest CNBC Live Interview With Becky Quick: US Economy & Freddie And Fannie Mae

On a 3 hour interview with CNBC's Becky Quick, Warren Buffett made several interesting comments on the US economy and on Freddie and Fannie.

• QUICK: ... One of the things we'd like to get straight to, though, is what you see happening in the economy right now. We've been talking to you for some time about what you see as some significant problems in the economy. And, from your perspective, have things gotten any better? Have they gotten any worse?
  
  BUFFETT: No, they've rippled out some, and that's what you'd expect. So the excesses in credit, the deleveraging that was required, the weak credits that are exposed, all that is--we're seeing manifestations out as the ripples go out, and I think I said one time that, you know, you only find out who's been swimming naked when the tide goes out. Well, we found out that Wall Street has been kind of a nudist beach. There's--it's just one discovery after another of firms that either didn't know what they were doing or that did things that they shouldn't have knowingly. And all of the troubles have not been revealed the first time around, usually, so there's considerable disillusionment that's set in in terms of are these guys telling us the truth now or maybe they just don't know what the truth is. So all of that's having an effect, and what we're seeing in business, in our retail businesses...
  
  QUICK: Mm-hmm.
  
  BUFFETT: ...certainly, anything to do with housing is even a further slowing down. I mean, June and July, both in terms of credit experience with people that first got into trouble of house payments and now on credit card payments and so on. And retail trade, it's not over by a long shot.
  
  QUICK: Does that make you think that things are going to continue to decline over the next, let's say, six months?
  
  BUFFETT: Oh, I think they could easily go beyond that, yeah.
  
  QUICK: What's your prognosis, or what's your best guess or your best estimate of what...
  
  BUFFETT: You never know. I've said in the past it ought to be longer and deeper, and I think it is going to be longer and deeper, but no one knows when--what you do know is that it will turn around. I mean, the country will be doing far better five years from now than it is now, but it won't be, in my judgment, it probably won't be doing better five months from now.
  
  QUICK: You talk about how this has rippled out and it's affecting the consumer at this point. Have the credit markets themselves gotten any better?
  
  BUFFETT: Well, the credit markets have had this situation where periodically it's seemed like they were getting better and then something else comes along. So the bankers feel a little bit better for a while and then something comes along and then they want to deleverage further. They find out they've got more trouble. Right now, for example, they're taking back all these auction rate securities. Well, they don't want to take things out of their balance sheet. So it's just one more problem for them, and you've seen these waves of problems and sometimes they create their own momentum. I mean, if the stock prices go down enough of the banks, then they feel like they can't sell securities. Of course, the extreme example was Freddie Mac was--has sort of been chasing a rabbit down the hill...
  
  QUICK: Right.
  
  BUFFETT: ...and promised they would raise additional money and of course the price of the stock got to the point where it became ridiculous. So troubles feed on themselves.
  
  QUICK: Let's talk about Fannie Mae and Freddie Mac, specifically. These are two stocks that it seems like every time you turn around are touching new low levels. There's a lot of concern out there on the market about these two stocks right now. What's your general take on how they got here and what you think's going to happen next?
  
  BUFFETT: Well, how they got here was they had two businesses, basically.
  
  QUICK: Mm-hmm.
  
  BUFFETT: They insured mortgages on a huge scale, trillions, and then they ran sort of a hedge fund, a carry trade where they bought mortgages and borrowed extensively against them. And because they had really the backing of the United States government--and everybody assumed they had the backing. I assumed it. And the truth is they do have the backing of the United States government in terms of their debt, not in terms of their equity--they were able to borrow without any normal restraints in terms of capital or margin requirements or anything of the sort. They had a by-check from the federal government.
  
  QUICK: Mm-hmm.
  
  BUFFETT: And they also had an added problem in that they had a dual mission. The government expected them to promote housing and the stockholders expected them to raise the earnings substantially every year. And as the years went by, they emphasized the latter more and more. They started talking about "steady Freddie," and Fannie Mae said, `We're going to increase the earnings at 15 percent a year.' Any large financial institution that tells you that sort of thing is giving you a line of baloney. I mean, they may do it for a while, but when they can't do it with operations, they do it with accounting and they cheat. And that's what happened at both those places on a huge, huge scale. And we have this--they're so wound up with national housing policy, that they're a national problem and, with this dual situation, you know, Lincoln said a house divided against itself, you know, must fall. And they existed half-slave, half-free for a long time, and then the motivations became in conflict, and when they got on the 15 percent a year merry-go-round and said, you know, `We're going to deliver earnings up every quarter, and we'll meet them to the penny,' when they can't do it operationally, they do it with accounting.
  
  QUICK: So what happens now? You mentioned that this is all tied up with the national housing situation now. Are they two big to fail, and what does that mean?
  
  BUFFETT: Yeah, they're too big to fail.
  
  QUICK: Yeah.
  
  BUFFETT: So that doesn't mean that the equity can't get wiped out, and it almost has in the stock market, and in practical sense as institutions, they don't have any net worth. I mean, if you look at their obligations and look at the fact they have big deferred tax assets as assets. They would've been gone in any market where the government wasn't behind them long, long ago. But the government is behind them, and they will stay behind them, and people that own insured mortgages or who own their debt, I think--nothing's going to happen to them. The equity and the preferred stock is another question and I think you'll see some action fairly soon. You've already seen it in the fact that the Treasury has made pretty much explicit what was formerly implicit.

On derivatives.

• QUICK: You've come out and said derivatives are the weapons of financial mass destruction before. But you use derivatives, too.
  
  BUFFETT: That's right. I don't say they're evil, per se.
  
  QUICK: Yeah.
  
  BUFFETT: I just say that once the genie opened the bottle on those many years ago, that their proliferation, their variation, their inability to be valued and their ability to allow institutions to pile up leverage like the world has never seen can cause great systemic problems. And that doesn't mean, you know--it's like gun powder or water. You can do damage with a lot of things, but these have systemic--they pose systemic risks. And incidentally, the government recognizes this. I mean, you've had a task force working on, you know, what do we do to prevent these things from causing a real problems? But they have caused problems so far. I don't think they're going to cause problems at Berkshire Hathaway. I know every single derivative contract we have. Now, when we bought Gen Re, they had 23,000 plus contracts.
  
  QUICK: Mm-hmm.
  
  BUFFETT: There was no way in the world I can get my mind around that. I mean, if I--if I had spent full time and had all kinds of assistants and everything, I never would've known what was in those contracts. We had one contract that was due in 100 years, so that meant that for 100 years some guy at our place put a mark on it every day and some guy at another place put a mark and they got their bonuses based on it. I mean, that is a system that is guaranteed to cause trouble. And so I got out of the business. It took me four years under benign market conditions, and we lost $400 some million in the process. So they are dangerous things. The ones we put on may be dangerous things, too, but I do know every contract, and I know what my gain-loss arrangement is and nobody else marks them. I mean, I keep track of it.

Source: http://www.cnbc.com/id/26337298/site/14081545/

Oh Freddie Mac

There were many who were clearly unhappy to see the bailout of Freddie Mac and Fannie Mae.

Jim Rogers was clearly annoyed. Published on the UK Telegraph, Jim Rogers attacks Fannie Mae and Freddie Mac bail-out

• Reaction to the Treasury and the Federal Reserve's bail-out plan was mixed but Mr Rogers was the most vocal. He argued that Fannie and Freddie, America's largest mortgage finance companies which own or guarantee some $5 trillion of mortgage debt, are "basically insolvent".
  
  He said: "I don't know where these guys get the audacity to take out money, taxpayer money, and buy stock in Fannie Mae." He added that the US government should instead have allowed Fannie and Freddie to go bankrupt.

And here is a link to a Bloomberg video, http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vIQvD7yNni2I.asf

George Soros wasn't too impressed either.

• "Freddie Mac and Fannie Mae have a solvency crisis, not a liquidity crisis," said Soros. "There's no problem in their borrowing. And in fact, insofar as there is a problem, the Fed is there to provide the liquidity."
  
  That said, both Fannie and Freddie are "extremely leveraged," he said.
  
  "The deterioration in the housing market, the foreclosures, are going to cause losses which exceed their equity," said Soros, whose famous bet against the British pound earned his Quantum Fund $1 billion in 1992.
  
  In afternoon trade on Monday, Fannie Mae shares were down 3.75 percent while Freddie Mac shares were down 12 percent.
  
  "This is a very serious financial crisis and it is the most serious financial crisis of our lifetime," Soros said. "It is inevitable that it is affecting the real economy. It is an idle dream to think that you could have this kind of crisis without the real economy being affected," he added.

The ideal dream mentioned by Mr. Soros, reminded me of the following passage I had read from iCapital.

• While the current US housing contraction has caused plenty of fears and worries, not just in the US but throughout the whole world, most do not realise that the direct impact of the housing contraction on the broad US economy has actually been rather limited. A lot of the damage has been at the psychological level. This is due partly to the fact that house prices, which have risen substantially, have been dropping recently. Another factor has been the constant media attention given to scary forecasts that the current housing contraction is the worst since the 1930 Great Depression and that this time round, it could be headed that way. Fortunately, the facts of the matter do not support such a negative view.

Facts of matter do not support such a negative view? Hmm.. I wonder if George Soros is referring to such ideal dreams from iCapital.

And yes, Warren Buffett used to own Freddie Mac. And the following passage from this past WashingtonPost article is most interesting.

• Buffett said he was troubled in part by a Freddie Mac investment that had nothing to do with its business.
  
  "I follow the old dictum: There's never just one cockroach in the kitchen," Buffett said.
  
  The government is trying to show that Brendsel's promises of double-digit earnings growth set Freddie Mac on a dangerous path, and Buffett said they were another key reason he sold.
  
  Sometimes, when executives offer earnings projections and cannot make the numbers, "they start making up the numbers," he said.
  
  Trying to deliver smoothly increasing earnings "can lead to a lot of trouble in any company," and it is "unachievable" at a company like Freddie Mac, whose business is inherently unpredictable, Buffett testified........
  
  Buffett said he bought stock in Freddie Mac in the 1980s because "it looked ridiculously cheap." He said his company became one of Freddie Mac's largest shareholders before it began liquidating its stake in the late 1990s at an eventual profit of about $2.75 billion.
  
  Buffett said he met with Brendsel and former Freddie Mac president David W. Glenn five or six times over the years at Brendsel's request, initially at a summer house Buffett had in Laguna Beach, Calif. Brendsel requested and followed some of his recommendations on whom Freddie Mac should appoint to its board, Buffett said.
  
  Buffet said he became troubled when Freddie Mac made an investment unrelated to its mission. He wasn't clear on the specifics but said he "didn't think that made any sense at all" and "was concerned about what they might be doing . . . that I didn't know about."
  
  Achieving "mid-teens" earnings growth "seemed to become more and more a mantra of the organization," giving him greater cause for concern, Buffett said.
  
  Buffett said he reviewed Freddie Mac's annual reports every year he held stock in the company. Presented with excerpts from reports for as early as 1992, he agreed with Brendsel's lead attorney, Kevin M. Downey, that he held onto his shares while Freddie Mac repeatedly affirmed its earnings goals.
  
  Buffett said he thought he expressed his concern to Brendsel in several conversations but added that he didn't keep notes or a diary and couldn't recall details.
  
  Downey said the specific wording about mid-teens earnings growth did not appear in a disclosure Freddie Mac filed in 2001, but Buffett rejected the implicit suggestion that Brendsel was responding appropriately to his concern.
  
  "He may have seen the writing on the wall," Buffett said.
  
  Downey suggested that Freddie Mac properly tempered its projections, pointing to warnings in an annual report that its earnings could be affected by various adverse developments. Buffett said the cautionary words were merely legal boilerplate.
  
  "I would not be particularly impressed by them," he said.
  
  Asked by the judge, William B. Moran, whether he felt his concerns were vindicated, Buffett said, "I think they were fully vindicated."

How Now Brown Cow?

Ok, the markets has rebounded. Our marker has staged a strong rebound on bargain hunting according to Bernama market wrap and according to the report from CNN the Bulls stage comeback.

So how Brown Cow?

Has the market hit the bottom?

Here is FSO's market commentator asking probably the question that is on everyone's mind right now, Markets Hit Bottom: But Will It Last?.

And if you are on cautious side and you want to read more about the risks involved in the current market, do read the following articles, The big bet that could melt Wall St. , Subprime woes: How far, how wide? , The risk in subprime.

Oh, and do pay attention to this twin terror, Fannie, Freddie threaten economy .

Why Fannie and why Fredie?

Simple.

US$1.4 trillion.

As mentioned in the article, "Fed officials have often argued the combined $1.4 trillion investment portfolios held by the two companies are so large and unwieldy they present a systemic risk to the broader economy and should be curtailed."

About The Bear's Liar

Here is a must-read essay: The Bear’s Lair: The dangerous games managements play

• Then there was Enron. The sentences handed out to Enron’s top management made it appear that its collapse was due to thieving but in fact the thieving was minimal in the context of Enron’s overall size. The collapse resulted from sheer incompetence. Enron was running a huge energy trading operation from a company whose debt rating never exceeded BBB. Consequently, when the market turned against it, Enron’s counterparties quickly required additional collateral to be posted and the house of cards collapsed. Enron’s energy trading operation was perfectly viable, as has been demonstrated by its subsequent success within UBS, but was far too big for anyone but a major international bank.
  
  Unlike earlier derivatives catastrophes, Ford’s and Fannie Mae’s losses don’t relate to poor trading, but from the difficulty in valuing a large portfolio of derivatives in financial statements. Financial Accounting Standard 133, which deals with derivatives valuation, allows companies to divide derivatives positions between trading, in which positions are marked to market and profits and losses taken and hedging, in which they are held for the long term against the asset being hedged. Naturally, you’re supposed to decide immediately you buy the derivative which category it will go into. In the case of Fannie Mae, management had been holding new derivatives positions for several weeks to see which way the market went, and then recording them so as to book the profits and leave the losses as hedges, to accrue over the life of the instruments concerned.
  
  Needless to say, when this trick was discovered much later, after Fannie Mae management had collected several years of record bonuses, it was more or less impossible to determine what the correct position should have been – thus the accounting uncertainty and the two years of cleanup work.
  
  Derivatives are sold by investment banks to corporations seeking to hedge risks in interest rates, currencies, equities or commodities. To the banks selling them, who make trading profits through their knowledge of the deal flow, they’re a wonderful business. To corporate management, which can use them to create artificial profits in a quarter in which earnings are falling short of forecasts, they may also be attractive – any accounting restatements occur several years later, and pass almost unnoticed by the market. For example Sears, now owned by ex-trader Ed Lampert, announced Thursday that it made more money -- $101 million – from trading in credit derivatives in the third quarter of 2006 than it did from its core retailing business --$95 million.
  
  I’m sure Lampert feels very proud of himself, and will be given some suitably munificent reward. However Sears shareholders – and customers, and employees – will wonder what the hell is going on. Trading credit derivatives is a huge distraction from management’s primary purpose of running a retailing operation. Indeed, the market reflected this view, with Sears’ share price dropping 5.5% on the day

And for the shareholder or the investor, the following paragraph says it all.

• To corporate shareholders derivatives are all risk and no reward. In addition to the risk of a rogue trader, the risk of a hedging system that proves flawed and the risk of overtrading, shareholders also suffer the risk of corporate management dressing up earnings. Further, whereas before the derivatives era shareholders in a company selling products in Germany knew they would have an exposure to the deutschemark/euro, and could judge the investment merits of that position, these days a company doing business in Germany may turned out to have exchanged that cash flow for floating rate Thai baht. At the end of the year, shareholders who read annual report footnotes carefully will discover their new baht exposure, but not before. Options make the position even more opaque. Given the agency problems between shareholders and management, and between management and traders, allowing companies to play the derivatives markets is a mug’s game for shareholders.

Remember the most important issue...

If the bet works out great, the management like in Fannie Mae's case, the maangement will take all the credit and most important, the BIG-FAT-OUT-THE-WORLD-BONUSES!!!

And what does the shareholder get?

And oh... if it fails.... what does the shareholder get?