For today's diary on the Fannie and Freddie investor bailout fiasco, I will simply post an excerpt and link to the FT story that the nonpartisan CBO (Congressional Budget Office) is adding Fannie and Freddie DIRECTLY to the Federal Budget.
Therefore, the $5.4T of leveraged debt-financed mortgages, subprime and ALT-A exotics bought in the dent market, guarantees, and their massive derivatives portfolio (what Buffet calls "Financial Weapons of Mass Destruction"), and the losses now associated with these now belong to YOU.
This bailout is happening because these firms are INSOLVENT and Bill Gross at PIMCO, the Bank of China, other FCBs and bond funds screamed for a bailout and got it. PIMCO, the worlds largest bond investment firm, alone made $1.7B in one day Monday, its largest single payday.
Since Case Schiller home price index is down 16%, assume conservatively this asset group you own is now down over $800B ($5.4T * 84%).
For this index to hit the historical median of 2.5 to 3x income, home prices must continue to fall at least another 20% assuming strong income growth.
I hope the Democrats and Obama stop this illegal and ruinous expansion of the Fedweral Debt from $10T to probably at least $12T, foisted on us by the unlelected "King Henry" Paulson by fiat. If they do not, when bond yields skyrocket and our children must spend their whole lives trying to pay it off, we will be very, very sorry.
Published: September 9 2008 15:57 | Last updated: September 9 2008 21:27
"The US on Tuesday began to face the financial consequences of the bail-out of Fannie Mae and Freddie Mac after Congress’s budget watchdog said the housing giants’ operations should sit on the government’s books and the cost of insuring against a US default started to rise.
Peter Orszag, CBO director, said: "It is the CBO view that Fannie Mae and Freddie Mac should be directly incorporated into the federal budget."
The two mortgage companies have between them $5,400bn in liabilities, equal to the entire publicly traded debt of the US, These will now all be accounted for by the CBO...
The price of credit default swaps on five-year US government debt rose to a record 17.5 basis points in early trading, according to CMA Datavision. This means that it now costs $17,500 a year to buy insurance on $10m of US government debt.
...the market believes the US government is more likely to default on its obligations than some other industrialised countries. "The USA is now ‘riskier’ than Norway, Germany, Netherlands, Sweden, Finland, Austria, France, Denmark, Quebec and Japan," said Tim Backshall, chief strategist at Credit Derivatives Research. "
Copyright The Financial Times Limited 2008
http://www.ft.com/...