It now appears the Senate will take up the EESA 2008 Rescue (it's not a bailout) Wednesday, with the increased FDIC limits to $250m and they will add in AMT tax relief, hurricane disaster relief and nearly $80 billion in renewable energy incentives and extensions of some expiring tax breaks, all of which are popular items in the Senate.
With likely passage in the Senate Wednesday night, this will jam EESA back to the House where, ironically, many Representatives who voted against the measure on Monday noted constituent correspondence and calls 99-1 against the Act before the vote, but 99-1 complaining the measure failed after the vote.
Again, intense pressure on Representatives, especially Republicans, in closely contested re-election races will be the key to swinging the dozen or so votes necessary to achieve passage, and this time the margin of passage could be more like 250-184, if not greater.
Another key measure may include a temporary suspension of mark-to-market accounting rules, although that issue effectively will be moot once the Treasury begins buying the worst paper at "near-maturity" prices as suggested by Ben Bernanke, which, effectively sets a "market" price (a willing buyer) which all other holders of similar paper will use as a price to re-value their already-written-down securities.
Accountants will be ''encouraged" to allow this, although, in a sense suspension of mark to market, even temporary, is a move toward less strict regulation, not more strict. But, since the Treasury will be setting prices, everyone will go along with it, at least for two or three years.
Additionally, there could be some relief for banks which saw the values of their Fannie/Freddie preferred stock decimated by the manner in which the GSEs were placed into conservatorship in early September.
One issue critical to normalization of interbank markets is to require the Federal Reserve to act as a counterparty for all interbank lending, giving assurance of repayment at all times. Perhaps we will see some form of this, but unfortunately not as part of EESA 2008.
In essence, as of this morning we now are at the point where "Doing Something" is taking precedence over "Doing Something That Actually May Work," and passage of EESA will be a "start," but not a panacea, to recapitalizing the banking system.
The piecemeal manner, $250 billion + $100 billion, with the additional $350 billion upon approval from Congress (likely a new Congress), assures us the when the second tranche is requested, it will be approved only with the addition of many other provisions, both business- and populist-oriented (and, possibly, an increase to the proposed overall $700 billion TARP limit.)
One of the future criticisms of EESA 2008, looking back some years from now, will be the issue of making big institutions bigger, even more "systemically important," at the expense of regional and community banks which will be acquisition targets of newly designated bank holding companies Goldman Sachs and Morgan Stanley.
If this was baseball, passage of EESA 2008 this week will mark the end of the Third Inning...in a game that likely may go into extra innings. The July Case-Schiller Home Price Index released yesterday again shows continuing deterioration of home prices in most markets, with the 20-city composite declining 16.3% year-over-year and 19.5% from its peak, but Dallas, Denver and Minneapolis now for several months have been registering minute gains, perhaps the beginning of some stabilization in the major-market heartland.
However, it is entirely possible that 3rd Q 2008 Personal Consumption Expenditures (PCE) will point to a decline in consumer spending July-September, which would be the first quarterly decline since 4thQ 1991. If so, it all but assures, at some point next year, NBER will look back and pronounce a recession which began in early 1stQ 2008.
And finally, the national debt likely will reach a milestone tomorrow: $10 trillion, following yesterday's and today's Treasury sale of Bills totalling nearly $100 billion (and another $45 billion Thursday. (Hat tip Calculated Risk) Add in GSE direct and guaranteed obligations, and total national debt begins to approach U.S. GDP of $14.2 trillion. And Hank Paulson's TARP hasn't even begun to cover the mess.
Tuesday, September 30, 2008
Sunday, September 28, 2008
Vote NO on TARP/EES Act of 2008
Yet Another Open Letter to Congress
September 28, 2008
Dear Senator or Representative:
I implore you on behalf of America and our children and grandchildren: Vote NO on the modified Troubled Asset Relief Plan.
This is bad legislation, fraught with long-term unanticipated, unintended consequences which, in the comfort of hindsight some years from now, will be glaringly obvious.
You deliberately are being misinformed by the Secretary of the Treasury, the Chairman of the Board of Governors of the Federal Reserve and the President in regard to the extreme urgency of the adoption of this plan.
Such urgency is not required. If, in fact, we were “only days away” from a global financial catastrophe, as was represented by the Administration on Thursday, September 18, 2008, then financial markets would have seized without regard to your deliberations.
Financial markets are functioning, as evidenced last week by Goldman Sachs raising $10 billion in fresh private capital, by Morgan Stanley finalizing negotiations for $8.5 billion in new capital, by JP Morgan Chase acquiring the assets and deposits of Washington Mutual, the largest bank failure in our history (and paying the FDIC $1.9 billion in the process – NO cost to taxpayers), and by Wachovia Corporation entering into negotiations to merge with a healthier institution.
The bankruptcy of Lehman Brothers, the emergency acquisition of AIG Insurance, the merger of Bank of America and Merrill lynch, the ban of short-selling of financial institution stocks and the calming of money markets and money market funds with an insurance plan and an emergency lending facility have stabilized the financial markets sufficiently to allow additional time to consider a better solution to our credit crisis.
As such, I urge you, again, to vote NO on this modified Troubled Asset Relief Plan, and start anew with bilateral negotiations to produce a reasoned plan which will better protect the nation, its citizens, its taxpayers, its creditors (both foreign and domestic), its financial institutions and its economy.
The risk of approving ill-advised legislation now, with long-term and unintended consequences, is far greater than the perceived risk of impending financial catastrophe which, by virtue of the positive developments in private capital markets last week, is a much more remote likelihood.
Better legislation should be drafted and approved in the coming months, preferably after the beginning of a new Administration and session of Congress in January 2009. If other financial institutions require government assistance before next year, solutions may be developed on a case-by-case basis without resorting to a sweeping plan which Congress has had inadequate time to consider.
Please vote NO on the Troubled Asset Relief Plan. Financial markets are NOT days away from catastrophe. Vote NO and urge your colleagues to vote NO, in favor of a new and better plan next year.
Friday, September 26, 2008
The Parable of Hank, the Unjust Steward (With Apologies to the Gospel of Luke)
1 There was a Rich Country who had a Secretary of the Treasury, and charges were brought to the Nation's Elected Representatives that this Man was squandering the Nation's property.
2 So the Elected Representatives summoned the Secretary of the Treasury and said to Him, "What is this that We hear about You? Give Us an accounting of Your management, because You cannot be our Treasury Secretary much longer."
3 Then the Treasury Secretary said to Himself, "What will I do, now that these Elected Representatives and the People may take My position away from Me? I am not strong enough to dig, and I am almost ashamed tobeg become a Lobbyist."
4 "I have decided what to do so that, when I am dismissed from the Nation's Administration," said the Secretary of the Treasury, "any number of very large and profitable Bank Holding Companies/Former Investment Banks will welcome Me back as Chief Executive Officer with an unbelievably enormous Compensation Package."
5 So, summoning Nation’s beleaguered Banks and Financial Institutions and Other Debtors one by one, the Treasury Secretary asked the first, "How much do you need to be fully and abundantly Recapitalized?"
6 The first troubled Former Investment Bank CEO answered, "Fifty Billion Dollars." The Treasury Secretary said to the Now-Bank-Holding-Company CEO, "Take your Troubled Assets, sit down quickly, make them valued at One Hundred Billion, and give them to Me at this 'Near-Maturity' Price, and You shall be made whole."
7 Then Treasury Secretary asked another besieged Major Bank CEO, "And how much in Distressed Assets do You possess?" He replied, "Thirty-Five Billion Dollars." He said to Him, ‘Take Your Balance Sheet and make it Eighty Billion Dollars, and give them to Me at this 'Near-Maturity' Price, and You shall be made whole."
8 And the Nation and its Elected Representatives commended the dishonest Secretary of the Treasury because He had acted shrewdly and in His Own Self Interest and They gave Him 700 Billion Dollars; for the Nation and its Elected Representatives figured that since China and Russia and Other Creditor Nations were funding this Troubled Asset Relief Plan, and those which will be necessary in the future, who among them really cared? and, anyway, "Dancing With the Stars" is about to start.
2 So the Elected Representatives summoned the Secretary of the Treasury and said to Him, "What is this that We hear about You? Give Us an accounting of Your management, because You cannot be our Treasury Secretary much longer."
3 Then the Treasury Secretary said to Himself, "What will I do, now that these Elected Representatives and the People may take My position away from Me? I am not strong enough to dig, and I am almost ashamed to
4 "I have decided what to do so that, when I am dismissed from the Nation's Administration," said the Secretary of the Treasury, "any number of very large and profitable Bank Holding Companies/Former Investment Banks will welcome Me back as Chief Executive Officer with an unbelievably enormous Compensation Package."
5 So, summoning Nation’s beleaguered Banks and Financial Institutions and Other Debtors one by one, the Treasury Secretary asked the first, "How much do you need to be fully and abundantly Recapitalized?"
6 The first troubled Former Investment Bank CEO answered, "Fifty Billion Dollars." The Treasury Secretary said to the Now-Bank-Holding-Company CEO, "Take your Troubled Assets, sit down quickly, make them valued at One Hundred Billion, and give them to Me at this 'Near-Maturity' Price, and You shall be made whole."
7 Then Treasury Secretary asked another besieged Major Bank CEO, "And how much in Distressed Assets do You possess?" He replied, "Thirty-Five Billion Dollars." He said to Him, ‘Take Your Balance Sheet and make it Eighty Billion Dollars, and give them to Me at this 'Near-Maturity' Price, and You shall be made whole."
8 And the Nation and its Elected Representatives commended the dishonest Secretary of the Treasury because He had acted shrewdly and in His Own Self Interest and They gave Him 700 Billion Dollars; for the Nation and its Elected Representatives figured that since China and Russia and Other Creditor Nations were funding this Troubled Asset Relief Plan, and those which will be necessary in the future, who among them really cared? and, anyway, "Dancing With the Stars" is about to start.
Another Open Letter to Congress
Dear Senator or Representative
I urge you to be resolute in resisting the Paulson/Bernanke Troubled Asset Relief Plan, as proposed, amended and currently in the process of being finalized for a vote.
It is a bad plan for America and there are better solutions which can be crafted over a more
reasonable amount of time with productive bipartisan cooperation.
Financial markets have calmed sufficiently following the events of the last 10 days, and the Lehman bankruptcy, AIG loan, short-selling ban, money market fund insurance plan and a free-market resolution today of Washington Mutual, accomplished without government funds, have bought you and your Congressional colleagues time to consider the most appropriate government action in a measured and reasoned manner.
Please do not be swayed by predictions of "financial armageddon" within days. Such fear-mongering is counter-productive and only will result in bad legislation with unintended consequences.
Now is a time for rational discussion and leadership, and much of both critically has been absent in the last week.
Please do what is right for America and oppose this ill-conceived plan.
I urge you to be resolute in resisting the Paulson/Bernanke Troubled Asset Relief Plan, as proposed, amended and currently in the process of being finalized for a vote.
It is a bad plan for America and there are better solutions which can be crafted over a more
reasonable amount of time with productive bipartisan cooperation.
Financial markets have calmed sufficiently following the events of the last 10 days, and the Lehman bankruptcy, AIG loan, short-selling ban, money market fund insurance plan and a free-market resolution today of Washington Mutual, accomplished without government funds, have bought you and your Congressional colleagues time to consider the most appropriate government action in a measured and reasoned manner.
Please do not be swayed by predictions of "financial armageddon" within days. Such fear-mongering is counter-productive and only will result in bad legislation with unintended consequences.
Now is a time for rational discussion and leadership, and much of both critically has been absent in the last week.
Please do what is right for America and oppose this ill-conceived plan.
Monday, September 22, 2008
It's NOT a "Taxpayer" Bailout
An open letter to mainstream media financial journalists:
For the love of all that remains which is good about this country, please take the initiative to stop referring to the Fannie Mae/Freddie Mac rescue and the soon to be approved $700 billion Troubled Asset Relief Program (TARP) as "taxpayer" bailouts, or government rescues which stick "taxpayers" with the tab.
These would be taxpayer bailouts ONLY if actual taxpayers were being required to fund these bailouts, in the form of imposing higher taxes.
Since we're all Keynesians now, and have been since the early 1970s with the brief exception of the last year or so of the Clinton Administration when the government ran a general budget surplus, we have been required to borrow every single dollar necessary to fund our budget deficits, our midnight basketball programs, our crab mating habit studies and, yes, our military misadventures around the world.
And now Congress is being asked to approve yet another increase to the national debt ceiling to $11.3 trillion, up $1.5 trillion in only two months. Add in the $5 trillion of now-explicit government guarantees of Fannie/Freddie debt, and we now will be in the appalling and frightening position of government debt exceeding our GDP by a sizable amount, which, along with an annual goods and services trade deficit approaching $800 billion, is unsustainable even in the immediate future, much less the bleaker future likely to be inhabited by our children and grandchildren.
The only other instance in which our national debt exceeded the annual output of our economy was in World War II, which was temporary because we were a creditor nation with a huge goods/service trade surplus. Today we are dependent upon the surplus savings of developing nations, which likely may not be a reliable source of funds in the future, especially in light of a global recession.
We have been borrowing our way to certain future insolvency as a nation, and an increasing portion of that debt is owned by foreign governments, not all of which may be described as "friendly." If there is a recent historical parallel, think of Great Britain following World War II, with huge budget deficits and equally large trade deficits, dependent on the kindness of strangers, principally the United States. It was forced to divest its empire, and, in 1956 was blackmailed and humiliated by the U.S. with the threat of currency devaluation over its attempt to retake the Suez Canal.
Britain backed down in the face of fiscal blackmail, and if history doesn't exactly repeat itself, surely it rhymes as Mark Twain said, as it already has been suggested that Treasury Secretary Paulson capitulated to the Chinese (and other unfriendlies) Fannie/Freddie bondholders in the manner in which the mortgage GSEs were taken over by the government, preserving bondholders while throwing common and preferred shareholders under the bus.
We can be assured that if the manner in which Wall Street was to be rescued only involved a massive increase in personal and corporate income taxes, and not the issuance of debt, that the Administration and the Federal Reserve would be far more willing to let moral hazard reap its bitter harvest and allow all these irresponsible financial firms to fail.
Instead, we are being asked to fund the mother of all "let's-take-care-of-our-own" rescues, NOT as a taxpayer bailout, but more of a "Blanche DuBois" bailout in which we, the United States of America, increasingly are dependent upon the kindness of strangers to fund our wretched excesses.
For the love of all that remains which is good about this country, please take the initiative to stop referring to the Fannie Mae/Freddie Mac rescue and the soon to be approved $700 billion Troubled Asset Relief Program (TARP) as "taxpayer" bailouts, or government rescues which stick "taxpayers" with the tab.
These would be taxpayer bailouts ONLY if actual taxpayers were being required to fund these bailouts, in the form of imposing higher taxes.
Since we're all Keynesians now, and have been since the early 1970s with the brief exception of the last year or so of the Clinton Administration when the government ran a general budget surplus, we have been required to borrow every single dollar necessary to fund our budget deficits, our midnight basketball programs, our crab mating habit studies and, yes, our military misadventures around the world.
And now Congress is being asked to approve yet another increase to the national debt ceiling to $11.3 trillion, up $1.5 trillion in only two months. Add in the $5 trillion of now-explicit government guarantees of Fannie/Freddie debt, and we now will be in the appalling and frightening position of government debt exceeding our GDP by a sizable amount, which, along with an annual goods and services trade deficit approaching $800 billion, is unsustainable even in the immediate future, much less the bleaker future likely to be inhabited by our children and grandchildren.
The only other instance in which our national debt exceeded the annual output of our economy was in World War II, which was temporary because we were a creditor nation with a huge goods/service trade surplus. Today we are dependent upon the surplus savings of developing nations, which likely may not be a reliable source of funds in the future, especially in light of a global recession.
We have been borrowing our way to certain future insolvency as a nation, and an increasing portion of that debt is owned by foreign governments, not all of which may be described as "friendly." If there is a recent historical parallel, think of Great Britain following World War II, with huge budget deficits and equally large trade deficits, dependent on the kindness of strangers, principally the United States. It was forced to divest its empire, and, in 1956 was blackmailed and humiliated by the U.S. with the threat of currency devaluation over its attempt to retake the Suez Canal.
Britain backed down in the face of fiscal blackmail, and if history doesn't exactly repeat itself, surely it rhymes as Mark Twain said, as it already has been suggested that Treasury Secretary Paulson capitulated to the Chinese (and other unfriendlies) Fannie/Freddie bondholders in the manner in which the mortgage GSEs were taken over by the government, preserving bondholders while throwing common and preferred shareholders under the bus.
We can be assured that if the manner in which Wall Street was to be rescued only involved a massive increase in personal and corporate income taxes, and not the issuance of debt, that the Administration and the Federal Reserve would be far more willing to let moral hazard reap its bitter harvest and allow all these irresponsible financial firms to fail.
Instead, we are being asked to fund the mother of all "let's-take-care-of-our-own" rescues, NOT as a taxpayer bailout, but more of a "Blanche DuBois" bailout in which we, the United States of America, increasingly are dependent upon the kindness of strangers to fund our wretched excesses.
Sunday, September 21, 2008
Congress: Oppose the Troubled Asset Relief Program
An Open Letter to Congress
Dear Senator or Representative:
I urge you to vote against Treasury Secretary Paulson's proposed $700 billion Troubled Asset Relief Program.
It is an outrage for the Treasury Department to propose plans, which, without any responsible oversight, allow it and the Federal Reserve to bail out irresponsible banks, investment banks and insurance companies.
We should be both appalled and frightened that in the span of three months, authority to increase the nation's debt ceiling will be increased by $1.5 trillion to $11.3 trillion, not inclusive of the Fannie Mae and Freddie Mac debt obligations (ostensibly $5 trillion) which we now have endorsed with an explicit U.S. guarantee.
As the fiscal year comes to a close with a projected $485 billion deficit, and worst-case estimates of FY 2009 deficits to range between $600 billion and $1 trillion, how can we reasonably believe these irresponsible fiscal actions will not lead to a destruction of the U.S. dollar and surging interest rates required by investors, increasingly foreign governments, to buy our increasingly tenuous debt instruments.
Including Fannie Mae and Freddie Mac obligations, our total nation debt now will exceed, for the first time since World War II, the total GDP of the United States. It has only been the very low interest-rate environment which has kept the cost of our profligate spending somewhat under control. At some point, perhaps sooner than later, buyers of our unending debt obligations may demand much higher interest rates due to the perceived higher risk of owning our debt.
It is not inappropriate to describe our reliance upon foreign governments to continually subsidize our deficit spending, including the TARP plan, as a matter of national security, given the implied opportunity (threat) for such governments to begin dictating terms by which they will continue to purchase our obligations.
Again, you are urged to vote against this plan as crafted, and require the Treasury and the Federal Reserve to rethink the methods by which the nation's financial system can be restructured.
Friday, September 19, 2008
Money Market Redemption
The U.S. Tresury will access a $50 billion Deression-era currency stabilization fund, last used to bail out Mexico in the 1990s, to insure money market shareholders from losses should funds "break the buck."
From Bloomberg:
The Treasury will insure for a year holdings of publicly offered money-market funds that pay a fee to participate in the program. Retail and institutional funds are eligible, the department said today in a statement.
``They're putting up a firewall,'' said Paul McCulley, managing director at Newport Beach, California-based Pacific Investment Management Co. ``It's the ultimate nightmare to have a run on the money markets -- that is truly the Armageddon outcome -- and they're not going to allow that to happen.''
From Bloomberg:
The Treasury will insure for a year holdings of publicly offered money-market funds that pay a fee to participate in the program. Retail and institutional funds are eligible, the department said today in a statement.
``They're putting up a firewall,'' said Paul McCulley, managing director at Newport Beach, California-based Pacific Investment Management Co. ``It's the ultimate nightmare to have a run on the money markets -- that is truly the Armageddon outcome -- and they're not going to allow that to happen.''
``This came just in the nick of time,'' Peter Crane, president of Crane Data LLC in Westborough, Massachusetts, which tracks money-market funds, said in an interview. ``We were likely going to see more funds halt redemptions'' and break the buck.
Bolstering confidence in money funds is more important than the danger that the move will encourage funds to make riskier investments to boost yields.
``This has got moral written all over it, but as has been case throughout crisis, now is not tine to worry about moral hazard,'' he said.
Moral hazard, indeed. Plenty of time to worry about that in the future. Financial Armageddon has been re-scheduled to another date and time - check local listings.
Thursday, September 18, 2008
Money Market Malaise
Update #1 September 18, 6:30pm EDT:
The Investment Company Institute reports total money fund assets fell a net $169 billion for the week ending Sept. 17th, ending at $3.413 trillion.
Institutional money fund redemptions totalled $173 billion and assets ended at $2.17 trillion, a 7.4% decline, while retail fund assets ended at $1.24 trillion, an increase of $4.3 billion, a 0.3% rise.
Institutions are heading for the exits. No one wants to be standing when the music stops.
Bloomberg update 09/18/2008, 05:41pm EDT
Money Market Funds Status As of September 18, 03:30pm EST:
Reserve Management Corporation: The Primary Fund, after a $40 billion redemption "run" on Monday, 09/15/2008 and Tuesday, 09/16/2008, following its disclosure of $785 million Lehman-related bond write-offs, announces a suspension of most redemptions for seven days after 3:00pm EST, Tuesday, 09/16/2008. Remaining $23 billion valued 09/16/2008 at NAV $0.97, "breaking the buck." Reserve Management, as an independent firm, has no "deep-pockets" parent company on which to rely for a bailout of the fund and could not, or would not, borrow to make the fund whole.
Bloomberg updated story 09/18/2008
Reserve Management press release 09/16/2008
Evergreen Investment Management Company: Evergreen receives cash injection of $494 million from parent-company Wachovia Corp. which has entered into support agreements with Evergreen Money Market Fund, Evergreen Institutional Money Market Fund, and Evergreen Prime Cash Management Fund in which Wachovia will support the value of Lehman credit held in the Funds. These agreements are intended to ensure that the decline in the value of the Lehman debt will not result in a decrease in the net asset value of the Evergreen money market funds.
Bloomberg updated story (at bottom) 09/16/2008
Evergreen press release 09/17/2008
Putnam Investments: Prime Institutional MMF, $15 billion, redemptions suspended as of close of business 09/17/2008 after fund assets declined to $12.3 billion on heavy redemption requests. Fund to be closed/liquidated, undetermined time-frame, and net proceeds (which could be less than $1.00/share) distributed to remaining institutional shareholders.
Reuters story 09/18/2008
Putnam Investments press release 09/18/2008
BNY Mellon: BNY Mellon Institutional Cash Reserves Fund, with assets of $22 billion, fell to $0.991 a share on Sept. 16. The New York-based company has ``isolated the Lehman assets in the fund into a separate structure,'' Ivan Royle, a spokesman for the New York-based company, said today.
The Investment Company Institute reports total money fund assets fell a net $169 billion for the week ending Sept. 17th, ending at $3.413 trillion.
Institutional money fund redemptions totalled $173 billion and assets ended at $2.17 trillion, a 7.4% decline, while retail fund assets ended at $1.24 trillion, an increase of $4.3 billion, a 0.3% rise.
Institutions are heading for the exits. No one wants to be standing when the music stops.
Bloomberg update 09/18/2008, 05:41pm EDT
Money Market Funds Status As of September 18, 03:30pm EST:
Reserve Management Corporation: The Primary Fund, after a $40 billion redemption "run" on Monday, 09/15/2008 and Tuesday, 09/16/2008, following its disclosure of $785 million Lehman-related bond write-offs, announces a suspension of most redemptions for seven days after 3:00pm EST, Tuesday, 09/16/2008. Remaining $23 billion valued 09/16/2008 at NAV $0.97, "breaking the buck." Reserve Management, as an independent firm, has no "deep-pockets" parent company on which to rely for a bailout of the fund and could not, or would not, borrow to make the fund whole.
Bloomberg updated story 09/18/2008
Reserve Management press release 09/16/2008
Evergreen Investment Management Company: Evergreen receives cash injection of $494 million from parent-company Wachovia Corp. which has entered into support agreements with Evergreen Money Market Fund, Evergreen Institutional Money Market Fund, and Evergreen Prime Cash Management Fund in which Wachovia will support the value of Lehman credit held in the Funds. These agreements are intended to ensure that the decline in the value of the Lehman debt will not result in a decrease in the net asset value of the Evergreen money market funds.
Bloomberg updated story (at bottom) 09/16/2008
Evergreen press release 09/17/2008
Putnam Investments: Prime Institutional MMF, $15 billion, redemptions suspended as of close of business 09/17/2008 after fund assets declined to $12.3 billion on heavy redemption requests. Fund to be closed/liquidated, undetermined time-frame, and net proceeds (which could be less than $1.00/share) distributed to remaining institutional shareholders.
Reuters story 09/18/2008
Putnam Investments press release 09/18/2008
BNY Mellon: BNY Mellon Institutional Cash Reserves Fund, with assets of $22 billion, fell to $0.991 a share on Sept. 16. The New York-based company has ``isolated the Lehman assets in the fund into a separate structure,'' Ivan Royle, a spokesman for the New York-based company, said today.
The fund invests cash deposited as collateral by clients who borrow securities from BNY Mellon, the world's largest custody bank. Lehman debt represented 1.13 percent of the fund's holdings.
No BNY Mellon press release available
More to come?
Wednesday, September 17, 2008
The Buck is Broken
From Bloomberg yesterday:
Sept. 16 (Bloomberg) -- Reserve Primary Fund became the first money-market fund in 14 years to expose investors to losses after writing off $785 million of debt issued by bankrupt Lehman Brothers Holdings Inc.
Update #5
03:30 pm EST 09/17/2008: Three-month Treasury bills are trading to yield 0.01% (the lowest yield ever?), in an unprecedented flight to quality and gold closed at $850.50 (Comex/NYMEX) up $70/oz., and up another $20/oz. to $870.50 in electronic trading.
The money market fund buck has been broken again, this time by The Reserve funds, the inventor in 1970 of modern-day money market funds. But can it be restored? And if other money funds begin imposing withdrawal/redemption restrictions, then what? These are the $3.6 trillion questions.
A massive liquidity panic, for one. If a few big funds begin prohibiting withdrawals, or bouncing checks written against balances, or restricting exchanges into safer, all-Treasury/Agency MMFs, an unprecedented run on balances will ensue as anxious shareholders scramble to redeem shares and wire-transfer proceeds to banks.
Anyone with a shareholder interest in a general purpose money market fund should re-read the above story about Reserve Primary Fund falling below the expected $1.00/share threshold as a result of its write-offs of $785 million of Lehman bonds held by the fund. Reserve Funds does not have a "deep pockets" parent company to support it, and could not or would not borrow to make the Reserve Primary Fund, and shareholders, whole.
Evergreen Investment Management, however, has avoided breaking the buck by obtaining nearly $500 million from parent company Wachovia Corp. (which has mortgage and credit-related issues of its own) following a write-off of $494 million of Lehman debt.
On Friday 9/12 the Reserve Primary Fund held $64 billion in assets. Following Lehman's bankruptcy Monday, the fund experienced a "run" of liquidations totalling $40 billion. As such, the fund, down to $23 billion in TWO days, has suspended withdrawals, and the Lehman impact has reduced the net asset value of the fund to $.97. Withdrawals now have been suspended for 7 days, but the suspension is likely to be extended, perhaps indefinitely, as additional distributions will force sales of bonds at losses which will compound the loss to investors.
Frankly, this is a worst case scenario, as this could cause a "run" on all general MMFs, which, surprisingly, are far more illiquid than one would think because the model was to chase high yielding securities (meaning longer term duration/maturity) to get higher advertised yields, and the models were based on a certain percentage of assets kept necessarily liquid to meet an expected amount of daily distributions.
The models DO NOT account for a "run" on the fund, and, as you would expect, the greater the run, the more illiquid junk is left in the fund, so that when they finally suspend distributions, it likely means distributions may be suspended for a long time as further liquidations of the portfolio would be at big losses.
For the first time in 14 years a "retail" fund has broken the buck. (Although last year Bank of America closed an institutional fund at under $1.00). If there is a flight to quality, a move to Treasury only funds (and it would appear there is a Treasury buying binge today), there may be many general purpose MMFs that suspend withdrawals which could be catastrophic in terms of inducing panic and shutting down consumer spending. This isn't getting a lot of media play yet, but it might in the next couple weeks if the runs begin.
Another fund group, Evergreen Investment Management, has obtained nearly $500 million of support from its parent company, Wachovia Corp., to protect three money market funds affected by losses from Lehman, or Evergreen also would have "broken the buck." A critical issue, of course, is to what extent can fund companies, or their corporate parents, fund losses to make shareholders whole. In the case of Wachovia, which has financial issues of its own related to mortgages and loans, it begs an important question regarding the "depth" of its pockets. Again, any redemption "run" on a fund makes it more likely it will require a suspension of withdrawals and an NAV below $1.00.
This is not a drill...Investors who have any $$$ personally in a general purpose MMF should exchange it immediately to a Treasury/Agency Only fund, or risk withdrawal suspensions and below-$1.00 NAVs.
Sept. 16 (Bloomberg) -- Reserve Primary Fund became the first money-market fund in 14 years to expose investors to losses after writing off $785 million of debt issued by bankrupt Lehman Brothers Holdings Inc.
The fund, whose assets plunged more than 60 percent to $23 billion in the past two days, said the Lehman losses forced the net value of its assets below $1 a share, known as breaking the buck. Reserve Primary, the oldest money fund in the nation, fell to 97 cents a share and redemptions were suspended for as long as seven days.
The only other money- market fund to break the buck was the $82.2 million Community Bankers Mutual Fund in Denver, which liquidated in 1994 because of investments in interest-rate derivatives.
Reserve Primary, run by closely held Reserve Management Corp. in New York, held $785 million in Lehman Brothers commercial paper and medium-term notes. The fund's board revalued the Lehman holdings as worthless effective 4 p.m. New York time, the company said today in a statement.
Carl Lantz, an interest-rate strategist in New York at Credit Suisse Securities USA, said the fund's failure ``exacerbates some of the flight-to-quality into Treasuries.''Crane said Reserve Management probably was unable to prop up the fund before halting redemptions because it lacked the backing of a large institutional owner. ``Reserve just didn't have the deep pockets to buy troubled securities out,'' he said.
Boston-based Evergreen Investment Management Co. said yesterday it had secured support from Wachovia Corp., its parent, to protect three money-market funds from losses linked to debt issued by Lehman. The funds' Lehman holdings totaled $494 million.
Money-market funds, which are regulated in the U.S. by the Securities and Exchange Commission, strive to preserve a $1 a share net asset value, meaning that investors can always get back their principal, as well as interest earned by the fund on its investments. They are required to hold debt that matures in 13 months or less, with a weighted average maturity of 90 days or less. The securities must have top short-term corporate debt ratings.
U.S. money-market mutual-fund assets were $3.58 trillion as of Sept. 10, just below their peak of $3.59 trillion set a week earlier, according to the Investment Company Institute, a Washington-based trade group.
* * * *Update #5
03:30 pm EST 09/17/2008: Three-month Treasury bills are trading to yield 0.01% (the lowest yield ever?), in an unprecedented flight to quality and gold closed at $850.50 (Comex/NYMEX) up $70/oz., and up another $20/oz. to $870.50 in electronic trading.
The money market fund buck has been broken again, this time by The Reserve funds, the inventor in 1970 of modern-day money market funds. But can it be restored? And if other money funds begin imposing withdrawal/redemption restrictions, then what? These are the $3.6 trillion questions.
A massive liquidity panic, for one. If a few big funds begin prohibiting withdrawals, or bouncing checks written against balances, or restricting exchanges into safer, all-Treasury/Agency MMFs, an unprecedented run on balances will ensue as anxious shareholders scramble to redeem shares and wire-transfer proceeds to banks.
Anyone with a shareholder interest in a general purpose money market fund should re-read the above story about Reserve Primary Fund falling below the expected $1.00/share threshold as a result of its write-offs of $785 million of Lehman bonds held by the fund. Reserve Funds does not have a "deep pockets" parent company to support it, and could not or would not borrow to make the Reserve Primary Fund, and shareholders, whole.
Evergreen Investment Management, however, has avoided breaking the buck by obtaining nearly $500 million from parent company Wachovia Corp. (which has mortgage and credit-related issues of its own) following a write-off of $494 million of Lehman debt.
On Friday 9/12 the Reserve Primary Fund held $64 billion in assets. Following Lehman's bankruptcy Monday, the fund experienced a "run" of liquidations totalling $40 billion. As such, the fund, down to $23 billion in TWO days, has suspended withdrawals, and the Lehman impact has reduced the net asset value of the fund to $.97. Withdrawals now have been suspended for 7 days, but the suspension is likely to be extended, perhaps indefinitely, as additional distributions will force sales of bonds at losses which will compound the loss to investors.
Frankly, this is a worst case scenario, as this could cause a "run" on all general MMFs, which, surprisingly, are far more illiquid than one would think because the model was to chase high yielding securities (meaning longer term duration/maturity) to get higher advertised yields, and the models were based on a certain percentage of assets kept necessarily liquid to meet an expected amount of daily distributions.
The models DO NOT account for a "run" on the fund, and, as you would expect, the greater the run, the more illiquid junk is left in the fund, so that when they finally suspend distributions, it likely means distributions may be suspended for a long time as further liquidations of the portfolio would be at big losses.
For the first time in 14 years a "retail" fund has broken the buck. (Although last year Bank of America closed an institutional fund at under $1.00). If there is a flight to quality, a move to Treasury only funds (and it would appear there is a Treasury buying binge today), there may be many general purpose MMFs that suspend withdrawals which could be catastrophic in terms of inducing panic and shutting down consumer spending. This isn't getting a lot of media play yet, but it might in the next couple weeks if the runs begin.
Another fund group, Evergreen Investment Management, has obtained nearly $500 million of support from its parent company, Wachovia Corp., to protect three money market funds affected by losses from Lehman, or Evergreen also would have "broken the buck." A critical issue, of course, is to what extent can fund companies, or their corporate parents, fund losses to make shareholders whole. In the case of Wachovia, which has financial issues of its own related to mortgages and loans, it begs an important question regarding the "depth" of its pockets. Again, any redemption "run" on a fund makes it more likely it will require a suspension of withdrawals and an NAV below $1.00.
This is not a drill...Investors who have any $$$ personally in a general purpose MMF should exchange it immediately to a Treasury/Agency Only fund, or risk withdrawal suspensions and below-$1.00 NAVs.
Tuesday, September 16, 2008
Too Big Too Fail Will Result in More of the Same Problems
(Or, Why the FIRE Economy Needs a Standard Oil/AT&T Solution)
Too Big to Fail" (TBTF) most certainly will result in "More Of The Same Problems" (MOTSP) again and again in the future unless we put out the FIRE economy.
We are doomed to repeat the present mistakes if, for example, solutions today deemed reasonable and plausible involve BIG financial institutions becoming BIGGER by merger, acquisition, shotgun marriage or government intervention.
While JP Morgan Chase picking up the pieces of Bear Stearns, Bank of America buying Countrywide and Merrill Lynch, and whatever solutions are crafted for Fannie Mae/Freddie Mac, AIG, Washington Mutual, Wachovia Bank, Morgan Stanley, et al, all may seem reasonable, possibly even prudent in the short run, these decisions leave in place even larger institutions that are "way too big to fail" (WTBTF) and "much too systemically important" (MTSI).
These mega-banks, -brokerages and -insurance companies, with more concentrated economic power and national market share, will have less concern with moral hazard in the future, knowing they always will be WTBTF and MTSI and knowing the government and the Federal Reserve will be there backstop the risk and socialize the losses.
It now is time to consider imposing a Standard Oil/AT&T solution to the FIRE economy (Finance, Insurance and Real Estate), and break up the financial giants.
Standard Oil was broken up in 1911. AT&T was dismantled in 1984. The republic, and commerce, survived both episodes, despite plenty of wailing and gnashing of teeth. The same can be and should be accomplished with the financial TBTFs.
Not today, or this month or possibly before the first term of the next president is complete, but soon, as the FIRE economy clearly is in a systemic turmoil created by the unfettered growth of individual financial institutions and the blurred regulatory lines which led to a generation of combining once-separated business lines.
To summarize: (i) Reimpose regulation to again separate - completely - banks, brokerage firms, investment banks and insurance companies; (ii) Regionalize the maximum geographical footprint of financial firms, and (iii) Prohibit bank, brokerage, investment bank and insurance company ownership interests in non-related financial entities.
The planning for an orderly dismantling - a regionalization - of the nation's financial system, however, should begin as soon as possible, and easily could be based upon the Federal Reserve's existing 12 geographic districts.
With the Federal Reserve poised to take on the role of financial super-regulator, with broad authority over banks, brokerages, investment banks, insurance companies and real-estate-related companies, a plan to limit the geographic reach of financial institutions to the regional footprint of their Fed districts not only is feasible, it's crucial.
Of course it would be challenging, but in no way impossible, to break up Citigroup and JP Morgan and Bank of America and other TBTFs, but how could it be any more difficult and expensive than watching these institutions implode, explode and re-combine as we are witnessing this year, yet resulting in bigger, riskier institutions likely to err again in the future?
The republic indeed would survive, and, in fact, be better off without the Damoclesian sword of systemic risk hovering above our heads.
In the absence of major FIRE economy reform, we forever will be held hostage to the moral hazard and systemic risk of financial institutions on the brink of failure, and forever requiring knee-jerk public, socialized bailout solutions. It is time to put out the FIRE economy before it burns us to the ground.
Too Big to Fail" (TBTF) most certainly will result in "More Of The Same Problems" (MOTSP) again and again in the future unless we put out the FIRE economy.
We are doomed to repeat the present mistakes if, for example, solutions today deemed reasonable and plausible involve BIG financial institutions becoming BIGGER by merger, acquisition, shotgun marriage or government intervention.
While JP Morgan Chase picking up the pieces of Bear Stearns, Bank of America buying Countrywide and Merrill Lynch, and whatever solutions are crafted for Fannie Mae/Freddie Mac, AIG, Washington Mutual, Wachovia Bank, Morgan Stanley, et al, all may seem reasonable, possibly even prudent in the short run, these decisions leave in place even larger institutions that are "way too big to fail" (WTBTF) and "much too systemically important" (MTSI).
These mega-banks, -brokerages and -insurance companies, with more concentrated economic power and national market share, will have less concern with moral hazard in the future, knowing they always will be WTBTF and MTSI and knowing the government and the Federal Reserve will be there backstop the risk and socialize the losses.
It now is time to consider imposing a Standard Oil/AT&T solution to the FIRE economy (Finance, Insurance and Real Estate), and break up the financial giants.
Standard Oil was broken up in 1911. AT&T was dismantled in 1984. The republic, and commerce, survived both episodes, despite plenty of wailing and gnashing of teeth. The same can be and should be accomplished with the financial TBTFs.
Not today, or this month or possibly before the first term of the next president is complete, but soon, as the FIRE economy clearly is in a systemic turmoil created by the unfettered growth of individual financial institutions and the blurred regulatory lines which led to a generation of combining once-separated business lines.
To summarize: (i) Reimpose regulation to again separate - completely - banks, brokerage firms, investment banks and insurance companies; (ii) Regionalize the maximum geographical footprint of financial firms, and (iii) Prohibit bank, brokerage, investment bank and insurance company ownership interests in non-related financial entities.
The planning for an orderly dismantling - a regionalization - of the nation's financial system, however, should begin as soon as possible, and easily could be based upon the Federal Reserve's existing 12 geographic districts.
With the Federal Reserve poised to take on the role of financial super-regulator, with broad authority over banks, brokerages, investment banks, insurance companies and real-estate-related companies, a plan to limit the geographic reach of financial institutions to the regional footprint of their Fed districts not only is feasible, it's crucial.
Of course it would be challenging, but in no way impossible, to break up Citigroup and JP Morgan and Bank of America and other TBTFs, but how could it be any more difficult and expensive than watching these institutions implode, explode and re-combine as we are witnessing this year, yet resulting in bigger, riskier institutions likely to err again in the future?
The republic indeed would survive, and, in fact, be better off without the Damoclesian sword of systemic risk hovering above our heads.
In the absence of major FIRE economy reform, we forever will be held hostage to the moral hazard and systemic risk of financial institutions on the brink of failure, and forever requiring knee-jerk public, socialized bailout solutions. It is time to put out the FIRE economy before it burns us to the ground.
Wednesday, September 3, 2008
Of Systemic Importance and Moral Hazard
It's been a busy summer. Treasury Secretary Hank Paulson engineered, Congress approved and the President signed legislation which will allow the Treasury to rescue, if necessary, ailing mortgage giants Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation), which together issued or back half of the nation's $12 trillion of mortgage debt.
Fannie Mae and Freddie Mac, those curious, privately owned financial hybrids whose debt is “implicitly guaranteed” by the U.S. government (taxpayers), are “systemically important” to the nation, and to the world, for all of the reasons we can think of, and a few reasons we wish we didn't have to consider.
Systemic importance now has replaced the awkward and colloquial “too big to fail” to describe those financial institutions deemed worthy of special consideration. IndyMac Federal savings Bank, seized by the FDIC in July and shaping up to be the third largest bank failure since the FDIC was created in 1933 with potential losses of $4 billion - $8 billion, apparently was not considered systemically important.
The Bear Stearns Companies, however, was deemed systemically important, not because of its stature as an investment bank but because of its sizable off-balance-sheet derivatives exposure – it was too “interconnected” to fail and it's rapid implosion in mid-March led to a government-officiated shotgun marriage with the nation's largest bank, JP Morgan Chase.
Bear Stearns was regarded so systemically important the Treasury Department was willing to let the Federal Reserve accept $29 billion worth of potential losses (to JPM's $1 billion) to get the deal done over the weekend before trading in Asia began on Sunday night and in the U.S. on St. Patrick's Day.
Bear Stearns's common shareholders took a huge hit, eventually receiving $10 a share, down 94% from an all-time high of $172 a share in January 2007 before the storm hit.
Fed Chief Ben Bernanke, speaking recently at an annual Jackson Hole, Wyoming conference, said “some thorny issues are raised by the existence of financial institutions that may be perceived as 'too big to fail' and the moral hazard issues that may arise when governments intervene in a financial crisis.”
In his remarks, Bernanke confirmed the systemic importance of Bear Stearns, not by its size but because it was “involved in a number of critical markets, including those for over-the-counter derivatives. One of our concerns was that the infrastructures of those markets and the risk- and liquidity-management practices of market participants would not be adequate to deal in an orderly way with the collapse of a major counterparty.”
“With financial conditions already quite fragile, the sudden, unanticipated failure of Bear Stearns would have led to a sharp unwinding of positions in those markets that could have severely shaken the confidence of market participants,” he added. So there you have it: March Meltdown avoided.
“The broader economy could hardly have remained immune from such severe financial disruptions,” Bernanke concluded. Not uncoincidentally, JP Morgan Chase has the league-leading position in off-balance sheet derivatives, nearly $85 trillion of notional (face) value as of year-end 2007, compared with Bear Stearns's $13.4 trillion. It was estimated by merging the companies about $6 trillion of notional value derivatives were netted, which represented the value of contracts in which Bear Stearns and JP Morgan Chase were counterparties.
Dr. Bernanke is making his case for a FIRE economy (Finance, Insurance and Real Estate) super-regulator and observed the critical question now before us is “how to strengthen our financial system, including our system of financial regulation and supervision, to reduce the frequency and severity of bouts of financial instability in the future.” The moral hazard issue is valid: the temptation to act irresponsibly via excessive risk-taking based on a now not-unreasonable expectation of government intervention and bailout when necessary. “Mitigating that problem is one of the design challenges that we face as we consider the future evolution of our system,” the Federal Reserve Chairman noted.
He and his Fed, Treasury and SEC colleagues likely will have their hands full grappling with that one, which returns us to the
continuing saga of the nation's mortgage companies, Fannie Mae and Freddie Mac and Hank Paulson's “bazooka” rescue plan. (Paulson told legislators in mid-July, “If you have a bazooka in your pocket and people know it, you probably won't have to use it.”)
Market participants, however, may not believe Paulson's bazooka to be loaded, judging from response to the plan in the last month. “We’re in a Catch 22,” said an unnamed mortgage company executive in a recent New York Times story. “As long as there is uncertainty over Treasury’s plan, we can’t raise money, and as long as we can’t raise money, there’s going to be more and more speculation about Treasury’s plan.”
Said another unnamed investment professional quoted by the NY Times: “You would have to be insane to invest in these companies right now, and we’ve basically told them that. When Treasury comes in, they are guaranteed to get a better deal than us, which would push down the value of our investment. So why would we ever invest before we know what Treasury is going to do?”
Investors now appear unwilling to inject further equity into Fannie and Freddie until the scope of Treasury bailout is known, but the Treasury will try not to unlock the vault full of taxpayer money to bail out the mortgage enterprises until all market investment alternatives are exhausted.
Stalemate, at least for now, but both Fannie Mae and Freddie Mac are running out of time based on recent sell-offs in their common and preferred shares. Freddie Mac had announced it would seek $5.5 billion billion of fresh capital in mid-May when its stock traded at $27.50. At a current share price well-under $5.00, raising $5.5 billion now would be hugely dilutive to existing shareholders, assuming new shareholders could be found willing to take the risk of a possible imminent wipe-out of equity holders by the Treasury.
Perhaps telling, investor Warren Buffett, who in the past has done well rescuing down-on-their-luck enterprises, acknowledged in late August he had been approached by Freddie Mac but passed on an opportunity to buy a big stake. Buffett's Berkshire Hathaway once had been the largest shareholder in Freddie Mac, but said his investment company sold its entire position after 2001 when he said he realized both Fannie Mae and Freddie Mac “were trying to report quarterly earnings to please Wall Street.”
More ominously, the Treasury rescue plan has run into a buzz saw of criticism related neither to the “privatized profits/socialized losses” nor the “economic-importance-of-housing” arguments surrounding the controversial plan reluctantly signed into law by President Bush at the end of July. Almost immediately after the Treasury revealed the plan particulars, which would crush common stockholders and perhaps the preferred stock, much of which is owned by U.S. banks, creating another problem. As it would leave more than $5 trillion of debt unscathed, it has been suggested the plan was influenced more by the impact on the many foreign government owners of Agency debt, notably China.
In the July 30th Wall Street Journal, commentary author Stephen Moore suggested members of Congress who voted for the bailout authority eventually may be asked, “Why are you taking money from U.S. taxpayers to bail out the Bank of China?” Moore describes the Bank of China as the biggest supporter of possible Fannie Mae and Freddie Mac rescues, and no wonder: “the Chinese own a half-trillion of Agency debt and they've put the warning out to Treasury Secretary Hank Paulson they expect to be paid in full.” (Emphasis ours.)
The chief fear at the Treasury and the Fed is “if Fannie and Freddie debt isn't repaid at 100% par, the Chinese may start dumping their hundreds of billions of Treasury securities, possibly causing a run on U.S. government debt and sharply raising Uncle Sam's borrowing costs,” Moore continued. And everyone else's borrowing costs he might have added. Overt selling of Treasury and Agency securities by foreign governments would send interest rates soaring within days, if not hours, once financial markets got wind of the sales.
Indeed, the amount of Agency debt held in custody by the Federal Reserve on behalf of foreign government owners has declined by $13 billion in the month since the bailout plan was approved after peaking at $986 billion the week of July 17 th, while foreign state holdings of Treasury debt has jumped $60 billion in the same time frame to a record $1.423 trillion.
And thus a conundrum. In the case of Fannie and Freddie, a bailout which keeps bondholders whole, at the expense of common and preferred shareholders, lends credence to those who believe we are capitulating to the wishes of foreign owners of Agency debt. If true, realistically, it now makes explicit a former implicit U.S. government guarantee of these obligations, making our total national debt now more like $15 trillion. More concernedly, if such tactics were successful, would we be at future risk for similar demands by our creditors?
On the other hand, if Agency bondholders (foreign and domestic) are given a “haircut,” in which bonds are redeemed by the Treasury at less than face value, say 90 cents on the dollar and, in essence, a partial default, would we then be provoking not only a sell-off of existing U.S. government debt – Treasuries and Agencies – but also be jeopardizing the sale of new debt, resulting in soaring interest rates and, for all intents and purposes, an economic disaster? And if preferred stockholders also take a hit and many of those securities are owned by other U.S. banks, attendant write downs could further weaken a fragile financial system.
With a fiscal 2008 budget deficit likely to exceed $400 billion and a fiscal 2009 budget deficit now estimated to approach $500 billion (net of Social Security surpluses of about $100 billion a year) we critically are dependent upon investor willingness to finance our shortfalls, and, as in the last decade, much of those bond purchases have come from overseas.
As an alternative, a more likely scenario now may be taking shape: the acquisition of Fannie and Freddie by a consortium of financial institutions, similar to how Long Term Capital Management was disposed of in 1998. Fannie and Freddie could be combined, then re-divided into a “good mortgage bank” and a “bad mortgage bank” (as in the Savings and Loan bailout). The good bank keeps the stuff worth holding, the 95% of performing mortgages, keeps the $50+ billion of preferred stock and junior securities (to keep U.S. banks whole) and the senior bonds, which would retain their implicit government guarantee, but common holders get thrown under the bus.
The “bad” bank gets saddled with $300 billion - $500 billion, or more, of dubious mortgage assets, acquired with newly issued Treasury debt (hence the necessary $800 billion increase to the national debt ceiling to $10.6 trillion) which get worked out over the next decade or so as economic conditions improve.
Some plan along these lines could appear in the next four-to-eight weeks. Messrs. Paulson and Bernanke will not allow Fannie and Freddie to fail, with the exception of common stockholders, as “failure is not an option.” They know the economic consequences of default are unthinkable.
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