Paulson: Foreign Interests Drove Fannie-Freddie Conservatorship
On September 7, the Treasury took a 79.9% stake in Fannie Mae (FNM) and Freddie Mac (FRE), placing the government-sponsored enterprises (GSEs) under conservatorship – quasi government nationalization. Treasury Secretary Paulson said government action was necessary to decrease the cost of mortgage finance for borrowers and help stabilize home prices. Details about the conservatorship and how it impacts GSE debt and equities can be found on the Treasury’s website.
The Wall Street Journal describes the chronology that unfolded after Paulson’s plan was approved by Congress in July. The Journal reports Treasury hoped receiving Congressional authority alone would be enough to provide confidence in the financial markets so that Fannie and Freddie would have access to enough capital to survive without government intervention.
As I described in a post last month, Paulson brought in Morgan Stanley (MS) to evaluate Fannie and Freddie’s books and get their recommendations on what kind of government intervention would be necessary to shore up the GSEs. Leading the Morgan Stanley team at Treasury was Robert Scully* who serves in the Office of the Chairman at the investment bank, and specializes in foreign sovereign wealth funds. And foreign sovereign wealth funds are the real reason Treasury put Fannie and Freddie into conservatorship.
As Senator Schumer told the Journal: “There was a real fear that foreign governments would start dumping Fannie and Freddie…and not buy the bonds.” According to the Financial Times, foreign central banks, sovereign wealth funds, and other foreign entities sold $14.7 billion in agency debt between July 16 and August 20. Since late June, the Bank of China reduced its holdings by $4.6 billion. (This correlates with my comments in the Leo and Virgo New Moon Cycle posts about foreign investors.)
Even though Treasury has stopped short of a full guarantee of GSE debt, the real moral hazard here is that Treasury has acquiesced to the demands of sovereign wealth funds. The threats of communist China and autocratic Arab nations took precedence over U.S. financial institutions, mutual and pension funds, and stockholders invested in Fannie and Freddie. This is what happens when U.S. government policies are biased to favor debt over savings.
Just as we are addicted to oil, the nation is addicted to E-Z credit. Addictions, as well as oil and credit, are ruled by Neptune. With Neptune the most elevated planet in the USA horoscope residing in the house representing foreign affairs and challenging the USA Mars, the government gets impatient with any obstacles that slow down or stifle getting our “fix.” And the government is even willing to use force (Mars) if necessary. Both the USA’s natal Mars and Neptune are ruled by Mercury, the planetary energy of communication. Located in the eighth house of the horoscope (debt), the USA Mercury in Cancer (real estate) opposes Pluto (debt) located in the second house (economy/financial system). It is the powerful players (the plutocrats) in the financial world who exert the greatest influence on economic policy. There are times when the message conveyed to the public (Mercury in Cancer) is opposite to what the government’s underlying agenda is (Pluto in Capricorn), as those in power recognize the real reason might not be palatable to the public.
So here we are this week with both Jupiter (foreign matters) in Capricorn (government) and Pluto (debt) in Sagittarius (ruled by Jupiter), whose energies emphasized as the two planets appear to move stationary direct from our earthly vantage point. Pluto will soon conclude its transit in the sign of globalization that began in 1995. Our consumer addictions were fueled by excess Federal Reserve liquidity to purchase cheap goods and oil from abroad, enriching these nations that in turn control us through our indebtedness.
Jupiter in Capricorn and Pluto in Sagittarius relate to the conflicting philosophical interests between political parties and within the investment community. The terms of GSE conservatorship reflect that Paulson wants to leave open the final determination of the GSEs to Congress and the next Administration. I had written that the government would probably not take a 50%+ stake in the GSEs; even Bill Ackman (who is shorting the stocks) recommended in a letter to Paulson the government take a 49% stake. The most avowed “free marketers” wanted nothing short of full nationalization of Fannie and Freddie (but with bond and MBS holders intact and shareholders fully wiped out).
One thing that most people can probably agree on is that the management at Fannie and Freddie needed to go. But again, there’s no moral hazard here, as Fannie’s Mudd and Freddie’s Syron will each receive several million dollars in severance, potentially departing with up to $15 million total compensation.
All this to potentially lower mortgage rates by one percentage point. The increase in government debt will push Treasury yields higher, increasing interest rates and mortgage rates. Banks are reluctant to lend money for mortgages as they’re having trouble borrowing money themselves. The only mortgages banks are willing to issue are for conforming loans with a 20% down payment. The problem lies with home prices and all the costs associated with operating a home, not mortgage rates.
The stated goals of reducing mortgage rates and protecting our financial institutions masked the true goals of appeasing our foreign creditors.
*Mr. Scully worked on the Chrysler bailout in 1980. One Saturn cycle later, the automaker owned by private equity firm Cerberus headed by former Treasury secretary John Snow, is seeking another handout.
USA: July 4, 1776 5:10 PM Philadelphia, Pennsylvania.
Disclosure: Long FRE
Posted 9/09/2008 11:15:00 AM