Skepticism swept over the financial blogosphere in response to the government's historic bailout of mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE) announced on Sept. 7.
Highlighting the "stunning reversals" in the stock, bond, currencies, and gold markets by late morning on Sept. 8, Mike Shedlock at href="http://globaleconomicanalysis.blogspot.com/2008/09/stunning-reversals.html">Mish's Global Economic Trend Analysis provided some nifty charts of the action in financial stocks Lehman Brothers (LEH), Washington Mutual (WM), and Wachovia (WB), as well as the preferred shares of Fannie. He wrote: "Today after a strong opening, it's looking like snake eyes for both the taxpayer and equity holders."
Many bloggers analyzed the government officials' statements and tried to figure out what it all means. One good irreverent line-by-line interpretation of Henry Paulson's statement comes from Jesse's Café Américain (hat tip to Naked Capitalism).
Losing Earnings Power
Picking apart the structure of the bailout, John Hempton at Bronte Capital says one big surprise is that the plan "looks more generous for the common [shares] than I would have expected and it is fairly generous to the preferred," given that both share classes will not be wiped out entirely (yet). "Whether the preferreds ultimately get paid anything of course will depend on the ultimate losses," Hempton writes. Both Hempton and Paul Kedrosky at Infectious Greed suggest that the bailout was designed to be this generous to get Fannie and Freddie managements to cooperate during the transition to a conservatorship.
Hempton also points out that Fannie is losing earnings power and no one knows the real amount of losses in its traditional mortgage portfolio.
Over at Blogging Stocks, Peter Cohan lists the "winners and losers" of the bailout. The winnners include Bill Gross at bond fund manager PIMCO, China's People's Bank, the former CEOs of Fannie and Freddie, and Wall Street firms that get fees for issuing securities, he says. The losers, according to Cohan: American taxpayers and homeowners.
Small Banks May Fail
What happens to banks that own common and preferred shares of Fannie and Freddie? "Many banks will have to take writedowns (as they mark to market), and some smaller banks will probably fail," wrote CalculatedRisk.
For taxpayers, the cost is unclear, CalculatedRisk says. But the agreement's terms will not protect taxpayers, argues Shedlock at Mish's Global Economic Trend Analysis. "At taxpayers' risk, the Treasury will lend up to $200 billion to the GSEs [government sponsored enterprises] at a mere 50 basis points over LIBOR," Shedlock wrote. "This is a massive asset-backed commercial paper (ABCP) scheme sponsored by the Treasury at taxpayer risk."
In the meantime, this plan won't save the housing market, which still faces excess supply, tighter lending standards, and still-high home prices compared to incomes, CalculatedRisk says. "The possible slightly lower mortgage rates are almost inconsequential compared to supply and price issues," wrote CalculatedRisk.
Outspoken pundit Barry Ritholtz at The Big Picture (who provides a long "linkfest" of news articles and opinions about the bailout) points out that "this is now the sixth Sunday night/Monday morning press release in 14 months aimed at saving the financial system." He asks if anyone wants to bet that this will be the very last bailout.