Tag Archives: fannie mae

Bailouts By The Numbers

Got Money?  / You Know It / Take it out your pocket and show it then throw it / This a way / That a way/ This a way / That a way…

citigroup$700 billion: TARP (also known as “stocking stuffer” on Wall Street)

$787 billion: Obama’s new stimulus package

$18-$50+ billion (and rising): Auto industry

$75 billion: Mortgage bailout for 4 million homeowners… ($18,750 per homeowner)

aig$80 billion+ (and more than $150 billion more in guaranteeing its loans): Citigroup

$150 billion+ (and rising): AIG

$400 billion: Fannie and Freddie

Total of just these bailouts: $2.2 trillion

In Comparison:

oprah-rich1$14.3 trillion: GDP of United States ($4.8 trillion: GDP of #2 Japan, $4.2 trillion: GDP of #3 China)

$65 billion: Market cap of Enron in its heyday

megamillions$58 billion: Net worth of Bill Gates

$1.5 billion: Net worth of Oprah

$750 million: The record amount that Obama raised during his run to the White House

 

Madoff’s $50 Billion Disappearing Act

madoff115: Countries with less than $50 billion in GDP (including the Dominican Republic, Kenya, and North Korea)

235: Times you’d have to win the Mega Millions $212 million jackpot

820: Number of Empire State Buildings you could buy, according to a recent appraisal ($61 million)

bentley1,786: Years you could (over)pay A-Rod ($28 million/year)

146,630: Number of new Bentleys you could buy 

Hitting the Fan

$300 billion: Market cap of GE in 2008

$71 billion: Market cap of GE today (around $7 a share)

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Random Thoughts on… Moral Hazard

An argument for studying economics is that one will leave school with an extensive knowledge of concepts and theories that are applicable in the real world.  An argument against studying economics, however, is that these theories are typically limited to a world where we assume all participants make rational decisions.  Given that Kath and Kim is still on the air, universal rationality is doubtful.

One economic concept, however, has stuck with me after college.  Moral hazard occurs when “an individual or institution does not bear the full consequences of its actions, and therefore has a tendency to act less carefully than it otherwise would,” thus “leaving another party to bear some responsibility for the consequences of those actions.”  For example, there is a moral hazard associated with life insurance.  After purchasing insurance, individuals may decide to take greater risks with their life.  twilightThey may be keener to go skydiving, try bungee jumping, or enter a crowd of teenage girls in line for Twilight.  After all, these individuals are now insured, so we can rationally understand (from the individual’s point of view) why they would be more likely to participate in dangerous activities.  However, from the point of view of the insurer, braving crowds of crazed middle schoolers pining after vampires is not recommended. 

We face moral hazards every day.  On an individual level, athletes anecdotally have had a drop-off in production following the signing of a guaranteed, long-term contract.  We act differently in a hotel room than when we’re in our own homes.  In my intro economics course, Larry Summers summed it up in a guest lecture: “You don’t wash a rented car.”   

In that same line of thinking, government bailouts may cause big companies to take more risks, with anticipation of being saved if they fail.  This can lead to even more trouble, as evidenced by the mortgage crisis (mortgage lenders that securitized their junky loans, backed by Fannie and Freddie, became more lax in lending).  Part of the Fed’s rationale for letting Lehman Brothers go under was because it feared creating a moral hazard if it had stepped in again, especially after its role in the Bear Stearns deal. 

impalaBut still, it’s hard to quantify the size of a moral hazard.  And there are times when the negative risks of the moral hazard outweigh the potential benefits of, say, a government bailout.  In the case of the auto industry, I’m not sure what would be best.  All I know is that I’ve been driving a rented car for the past ten months, and I’ve gotten it washed.  Twice.

 

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The Presidential Debate Redux, With Michael Scott

TOM BROKAW: Good evening from Belmont University in Nashville, Tennessee.  I am Tom Brokaw of NBC News.  Welcome to the second presidential debate of this campaign season, sponsored by the Commission on Presidential Debates, AIG, and Dick Fuld’s compensation package.  As you have noticed, this is the first ever debate to feature not only the two presidential candidates, but also a representative of middle America, Michael Scott of the Dunder Mifflin Paper Company.  Welcome, Senator Obama, Senator McCain, and Mr. Scott. (polite applause)

MICHAEL SCOTT: Tom, I would prefer that you address me as Senator Scott.

TOM BROKAW: (long pause)…Uh, okay, let’s get started.  The first question is to Senator Obama.  This from Oliver Clark.  Oliver asks: Through this economic crisis, most of the people that I know have had a difficult time.  How is this bailout package actually going to help these people out?

SENATOR OBAMA: Thanks Tom.  Oliver, first, let me tell you what’s in the rescue package for you. Right now, the credit markets are frozen up and what that means, as a practical matter, is that small businesses and some large businesses just can’t get loans.  If they can’t get a loan, that means that they can’t make payroll. If they can’t make payroll, then they may end up having to shut their doors and lay people off.  And if you imagine just one company trying to deal with that, now imagine a million companies all across the country.  So it could end up having an adverse effect on everybody, and that’s why we had to take action. But we shouldn’t have been there in the first place.

SENATOR McCAIN: I’d like to jump in here.  My friends, Oliver’s question is a good one.  You know, the match that lit this fire was Fannie Mae and Freddie Mac. I’ll bet you, people like Allen and Mr. Scott here probably never even heard of them before this crisis.

MICHAEL SCOTT: (perplexed)Who’s Allen?

SENATOR McCAIN: See?  So, Fannie and Freddie were the match that started this forest fire.  Some of us stood up against it. There were others who took a hike.

TOM BROKAW: Thank you Senator McCain.  Mr. Scott, do you have anything to add?

MICHAEL SCOTT: Tom, again I would prefer it if you addressed me as Senator.  And yes, yes I do have something to add.  You know, I run a paper business out in Scranton, Pennsylvania.  While Fannie and Freddie are out there lighting fires, guess who, or more importantly, what–is getting burned?  That’s right: paper.  And you know what will happen if these forest fires don’t get extinguished?  No more paper. (McCain nodding somberly) Now, I’ve taken a hike before, don’t get me wrong.  There are many beautiful trails outside of Scranton.  But if we keep having these fires, what’s going to happen to these trees that overlook the trails?  Whoa, big fire, (simulates fire with hands) Smokey the Bear can’t save us, ahhh–there goes the paper!  There go the trees!  There go the trails!  Now I’m out of both a job and an enjoyable weekend hobby.

TOM BROKAW: …Right.  OK, next question.  Senator McCain, in all candor, do you think the economy is going to get worse before it gets better?

SENATOR McCAIN: My friends, we can fix our economy. Americans’ workers are the best in the world. They’re the fundamental aspect of America’s economy.  They’re the most innovative. They’re the best–they’re most–have best–we’re the best exporters. We’re the best importers. They’re most effective. They are the best workers in the world.

TOM BROKAW: (confused) OK… Senator Obama?

SENATOR OBAMA: Part of the problem here is that for many of you, wages and incomes have flat-lined. For many of you, it is getting harder

MICHAEL SCOTT: That’s what she said!

SENATOR OBAMA: (looking pissed) Excuse me?

MICHAEL SCOTT: Sorry, that’s just a thing I do, I–you know, OK, so seriously–the economy.  I mean, I live a pretty good life.  I don’t own 8 cars or anything, but I do own my own condo, I run my own branch of Dunder Mifflin, AND (pointing to stomach) I am a soon-to-be father.

TOM BROKAW: Congratulations, but we really need to get on–

MICHAEL SCOTT: (continuing) Now, do I want to raise my child in a country where America is #2?  Where we’re sitting at home, looking up as Madagascar laps us in the recyclable paper business?  No, no–that is not what I want for my child.

TOM BROKAW: Thank you Mr. Scott.

MICHAEL SCOTT: (wagging finger) Tom???

TOM BROKAW: (reluctantly)…Senator Scott.  Let’s move on.  Next question, Senator Obama: There are some real questions about whether everything can be done at once.  Health care, energy, and entitlement reform–give us your list of priorities.

SENATOR OBAMA: Terrific question, Tom.  We’re going to have to prioritize, just like a family has to prioritize. Now–

SENATOR McCAIN: (interrupting) Hey look, we’re not–we’re not–we’re not rifle shots here.  We are Americans. And I think you can do all three at once.

MICHAEL SCOTT: (whispering) That’s what…

TOM BROKAW: That’s enough.  We’re moving on.  Our last question is from a hippie in New Hampshire.  She asks: As president, how will you know what you don’t know and what will you do when you figure out that which you don’t know?  Senator Obama, I’ll start with you.

SENATOR OBAMA: Tom, one of the things that we know about the presidency is that it’s never the challenges that you expect. Here’s what I do know: I know that if the economy continues to struggle, Mr. Scott over here is going to have a tough time keeping up with the mortgage payments on the condo he’s got.  His firm may soon be facing the real possibility of having to let some people go.

We can’t expect that if we do the same things that we’ve been doing over the last eight years, that somehow we are going to have a different outcome.  We need fundamental change. That’s what’s at stake in this election.

MICHAEL SCOTT: (looking fearful) Will there still be enough money for a Christmas party?

SENATOR McCAIN: My friends, there are challenges around the world that are new and different and there will be different–we will be talking about countries sometime in the future that we hardly know where they are on the map, some Americans. (Michael Scott nods emphatically)

When times are tough, we need a steady hand at the tiller and the great honor of my life was to always put my country first. And–and–you know who is going to raise our taxes and take away Christmas?  That one.  (points at Senator Obama)

MICHAEL SCOTT: (running from stage) Noooooooooooooo!!

TOM BROKAW: And that concludes tonight’s debate from here in Nashville.  We want to thank Belmont University, the Commission, and the traffic light operator for tonight’s debate.  There is one more opportunity for the talking heads to give their stump speeches: next Wednesday, October 15, with host Ryan Seacrest and musical guest Akon.  Good night everyone.

(NOTE: All text in black is what was actually said, taken from the CNN transcript of Tuesday night’s debate.)

 

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Justifying Our Love for David, Justin, Britney, And Of Course, Madonna

It starts with shortness of breath. Next comes the hyperventilating, the eye twitches, the body spasms, and mangled speech. The flailing arms come out soon after, trying to seek reassurance from anyone passing by: “Did you see that? Did you see him? That was him! That was him!” Deep breaths. Regain composure. Put the crazy face away, and try to look nonplussed that David Beckham just walked RIGHT by you, and grazed your shirt with his arm. David Beckham. His arm. Your shirt. That shirt will never get washed again.

Sound familiar, or likely?

It can be easily argued that we live in a celebrity culture. With resources like People.com, TMZ, and the ever-infallible Perez Hilton, we know more intimate details about celebrities than we do our own friends and family. I may not know the name of my best friend’s ex, but I do know that Jared Leto used to date Cameron Diaz, who used to date Justin Timberlake, who used to date Britney Spears, who used to date Kevin Federline, who used to date nobody famous… that is, before dating, impregnating, marrying, and divorcing, Britney Spears. Through the celebrity-stalking bible known as Us Weekly, I’ve learned that Michael Phelps likes Chinese food, Ricky Martin likes boxer briefs, and Lindsay Lohan likes women. From watching E! News and listening to Ryan Seacrest on the radio, I have developed a wealth of celebrity trivia that would make my high school US history teacher cringe. What year did Madonna’s first album come out? 1983. Who played the little girl in Remember the Titans? Hayden Panettiere. What did Jessie take that got her “so excited” but yet “so scared”? Caffeine pills. No, I may not know exactly what Fannie Mae and Freddie Mac do, or where to find Pakistan on a map, but I can tell you that back when they were married, Dennis Quaid cheated on Meg Ryan. (Plus, I’m guessing that Fannie/Freddie and Pakistan/Iraq aren’t all that important anyways.) It may be hard to justify, but celebrity stories trump news stories every time.

For many of us, celebrities are just incredibly fascinating. Typically most of us would think that it’s crazy to camp out on the sidewalk for hours, just to get within screaming distance of a children’s book author. We would find it odd to reach out and grab at random strangers’ arms, legs, and (other) body parts. Perhaps we want to get close enough to verify that celebrities are, indeed, human. And so we change our shopping route to follow them at the supermarket. We stare at them, enraptured, as they do mundane things that all of a sudden seem fascinating. We try to take a picture of them buying carrots with our camera phone. Maybe all of it is just to confirm that they too eat food, walk places, and have boring days. Maybe it’s to reassure us that they are, kind of, just like us.

Then again, if they were really just like us, they wouldn’t be celebrities. So we live vicariously through their awards nights, champagne parties, airport rampages, and drug busts. We dedicate our whole day to wait in line for tickets to see Madonna, and we set aside The Shirt That David Beckham Touched for framing. It may not be right that we place celebrities on a higher pedestal than prime ministers, Congressmen, royalty, philanthropists, teachers, doctors, firefighters, police officers, community organizers, war veterans, environmentalists, public defenders, public servants, social workers, human rights activists, and often in the case of young people, parents… BUT, celebrities have brought us entertainment in the form of Britney & Kevin: Chaotic. So, I feel quite justified.

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Lessons Learned from Buying Lehman at $61

In the past few days, another investment bank has fallen, another huge government bailout has been announced, and WaMu customers are making like it’s 1929 and rushing to take money out of their Whoo Hoo! checking accounts. Year to date, the S&P 500 has fallen by over 20%, unemployment is at a five-year high of 6.1%, and it doesn’t seem like the end is in sight.

So, how did this all happen? What has caused Morgan Stanley to court Wachovia, and WaMu to pimp itself out to the Koreans? We’ve heard the terms “housing bubble” and “subprime crisis” and “credit crunch” ad nauseum over the past few months… but what does it all mean? The following is my attempt to explain the recent travails of the economy, and why I probably never should have bought Lehman at $61:

A couple years ago, you bought a house and took out a $300,000 mortgage on it. The bank that issues this mortgage takes it and pools it along with other customers’ mortgages. Then they sell this product, called a mortgage-backed security, to Lehman Brothers. Lehman likes buying mortgage-backed securities, since it can get a decent return for a perceived low amount of risk, as historically, people rarely default on their mortgages. All the other big investment banks/brokerage houses are doing it too, and so there’s a strong secondary market out there for these securities. This is a seemingly win-win situation for all: a profitable venture for Lehman, and a way for the banks to lend more money and increase home ownership.

Enter subprime.

The banks and mortgage lenders are doing well; they can sell off their pooled mortgages to the traders at Lehman, or to Fannie Mae and Freddie Mac. Much of the risk that the customer will default, then, can be transferred. Thus, the mortgage lenders start getting more lax in their lending terms. More and more subprime mortgages are issued, which involves lending to high-risk borrowers like your deadbeat cousin Charlie. The lending terms are structured so that it looks good at the time of signing (encouraging more Charlies to borrow), but after a certain initial grace period, borrowers are hit with much higher rates.

Meanwhile, the MIT grads at Lehman are concocting new complex derivatives in order to make money. Remember that a mortgage-backed security is already a pool of mortgages. Now, the guys on the Street are trading pools of these pools. And pools of pools of pools. Your $300,000 mortgage is all part of this. Thankfully, you, as a credit-worthy, responsible citizen, have been diligently making payments. But Charlie, who is using his home as a laboratory for crystal meth, is not. Of course, mortgages had already been pooled to mitigate the risk of individual borrowers defaulting. BUT, if a whole bunch of people start using meth instead of paying off their mortgages, then we’re in trouble not just for that one security, but for all of its new derivatives as well.

Then, to make matters worse, the housing bubble bursts.

Prior to 2005, housing prices had been on the rise, with higher sales and consequently, more homes being built. At some point though, supply far exceeded demand, and housing prices began a steady decline. Let’s say the house you bought was worth $300,000 at the time of your purchase. Now, the price of your home is at $200,000, a decline of 33%, right around the rate that housing prices in Southern California have declined. Because the price of his house has fallen too, your cousin Charlie can no longer afford his monthly payments (which have also skyrocketed after his low-rate grace period expired). He, along with thousands of other subprime borrowers, defaults. His meth lab goes into foreclosure. You’re still scraping by, but your monthly payments are going up because the price of your home has dropped so dramatically.

While all this is happening, Lehman and other banks with large portfolios of mortgage-backed securities are taking the losses incurred from all the Charlies defaulting. They also face the suddenly very real risk that you may default too. Already saddled with these losses, the prices of all mortgage-backed securities (and its derivatives) drop across the board. No one wants to buy, and so the value of these assets just continue to plummet. Firms are forced to issue billions of dollars in write-offs. Lehman’s stock price falls and it tries to raise capital–not only because it needs more cash as collateral for its lenders (like your mortgage payments going up when your house price falls), but also to assuage outside perception that it’s going under. But there aren’t too many institutions out there that are in a position to lend money, and not many that want to do it–especially to a firm whose net worth is unknown because of all its mortgage exposure. Banks everywhere enact tougher lending standards to individuals and businesses, making it universally difficult to get cash… thus leading to a “credit crunch”.

So in the end, with a portfolio full of assets that have no market, hedge funds aggressively shorting its stock, and no one willing to lend it money, Lehman files for bankruptcy. Charlie is living on the streets, you’re struggling to pay your mortgage, and more turmoil (involving more derivatives, including AIG’s credit default swaps) is roiling the market… Not a very happy ending.

Obviously this is a simplified version of what happened in the overall economy; in reality, the chronology of what happened is not as linear, and the situation at Lehman was far more complicated than anything I could explain. Many of our venerable publications will do a far better job of sorting through the mess than I have, but hopefully this can serve as a primer. After all, this story is probably not over yet.

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