And They're Off

My, the sleazier elements of the plaintiffs' bar didn't take long to follow Napolitano's advice. The first takings cases arising from The Fall of Fannie and Freddie (soon to be a major motion picture and a video game) have already been filed. Hope those guys have done their due diligence to support those claims. Yeah right. OK, I hope they have good malpractice insurance that covers court sanctions.

More on the Bailout

Well, stocks took off like a rocket yesterday because the Feds have come to the rescue and will save us all from Fannie and Freddie. But before you join the latest round of irrational exuberance, you may want to consider a few things.

First, Andrew Napolitano, Fox's con law talking head, thinks the whole bailout is an unconstitutional taking of the shareholders' property and will be tossed in the courts. Given that Judge Wapner's..er..Napolitano's whole schtick is that the federal government can't flush without committing a taking, I'm inclined to take his analysis with a grain of salt. I suspect he's missing a crucial point, such as the terms of the GSEs' charters, which any shareholder's rights would be subject to. Nevertheless, some clever lawyers might latch onto this and throw sand in the gears, and the proposal doesn't need any more grinding mechanisms.

For example, major credit default swap players have concluded the bailout is a credit event triggering the swaps. So far there has been no unwinding because the government guaranteeing payments, so there are no losses. Yet. The guarantees are funded only through 2009, and the protection buyers may see this as the last stop to get off of this train. If that happens, watch out.

Don't forget as well that the bailout won't help vast areas of the market one bit. GMAC is probably spinning in and may file Chapter 11 tomorrow. Its stakeholders are in trouble and can't afford the drain.

We shall live in interesting times.

It's Over

No, not the End of the World, drama queens, but certainly the end of the American way of doing business. From the first colonists to now, the US economy has been based on the single-family home. Industry, energy, transportation, fiscal policy, everything was geared toward home ownership. That's what Fannie and Freddie were all about: keeping the cost of buying a home down. Now they're gone. They held half the home mortgages in the US, so there is simply no way this will not make it more difficult and more expensive to get a mortgage. Some pundits are claiming that the government takeover will ease the credit crunch and lower rates, but folks there's only so much debt Uncle Sam can absorb, and he's already up to his earlobes. Not all F&F paper will have to be covered, but a lot of it will be because they weren't exactly holding the best. And what happens when the FDIC come knocking (Silver States went down last week, and we're just getting started.)? Believe it or not, there is only so much to go around.

What happens now? Home ownership rates decline. Development capital shifts to rentals. At some point you'll see whole condo complexes convert to apartments.

Who wins? Who knows? The details are still fuzzy. F&F shareholders have one last chance to find suckers to sell to, so maybe they win. Bondholders have federal backing, for what that is ultimately worth. There are supposed sweeteners for home owners, but those are election year window dressing that will cause more trouble than they're worth.

I can tell you who loses, though: the US Taxpayer. I guarantee it.

I Really Want to Know

What does everybody think about the Fannie and Freddie mess?

It Begins in Earnest

Fannie Mae has halted trading after hours and has replaced three C-levels, including the CEO. I can't imagine Freddie won't have to do something similar soon. Then the government will either have to let them sink (political nitro, Congress won't do it) or take them over (MUCH more likely, but effectively doubling the national debt). Nothing good can come of this, unless you own a gold mine.

Fun with Fannie and Freddie

As I wrote back on 27 March ("This is a good idea?"), Fannie Mae and Freddie Mac have had their capital requirements reduced so they can save the mortgage markets. They also had their limits increased dramatically so they may now acquire Alt-A size mortgages, even though Alt-A is shaping up to be a bigger meltdown than subprime. And even though Fannie and Freddie posted multibillion dollar Q1 losses. Guess what, folks, you're in the mortgage business, making the world safe for stupid mortgages. Your tax dollars at work.