LOLFED

I’m in ur financial system! Takin ur institutions under conservatorship!

A take on Bernanke and Paulson’s manifest destiny, from Lolo:

It’s a bird! It’s a plane! It’s a BAILOUT!

Fed and Treasury agree to buy up preferred stock from Fannie Mae and Freddie Mac, buy some more mortgage backed securities, and basically toss money left and right into the crappy MBS market because awww, banks who own this crap are on the verge of meltdown:

The agencies believe that, while many institutions hold common or preferred shares of these two government-sponsored enterprises, a limited number of smaller institutions have holdings that are significant compared to their capital.

Where’s the common going? Oh, I don’t know, probably zero. Because we’re putting the big fish first.

“While conservatorship does not eliminate the common stock, it does place common shareholders last in terms of claims on the assets of the enterprises,” Paulson said. “Similarly, conservatorship does not eliminate the outstanding preferred stock, but does place preferred stock shareholders second, after the common shareholders, in absorbing losses.”

What will it cost? Who knows. Depends on the default rate. Where is that going? Who knows. Probably higher, though. As a US taxpayer, I guess this makes me now a slumlord.

EDITED TO ADD: As I just explained Fannie and Freddie’s mechanisms to a friend, I think I will put the explanation I gave her here in case anyone else needs it –

Basically it works like this: A bank makes a mortgage loan. Then, the bank can sell it to Fannie/Freddie. Then they use the $$ they get from selling it to make more loans. Repeat many many times.

Fannie and Freddie bundle all those mortgages they are buying into a mortgage backed security (MBS). Then F&F sell those MBSes - to other banks, to mutual funds, to anyone who is buying basically. And the content of some of those MBSes really sucks because houses are devaluing and people are defaulting and nobody wants MBSes anymore bc we don’t know how bad they really are. Fed and Treasury bought a bunch of MBSes too, trying to stabilize this market.

And yep, the banks do own F&F stock, too, lots of it. JPMorgan is one of the biggest owners of that preferred stock. This announcement was really kinda two pronged. Fed/Treasury are trying again to stabilize the MBS market by buying up some MBSes and are hopefully under conservatorship trying to stop the banks’ investments in F&F from going to 0. The common stock that Joe Average can buy is probably going to 0 though, Paulson reaffirmed it is dead last in priority.

PASADENA, California (Reuters) - Hundreds of worried IndyMac Bancorp Inc customers descended on the company’s branches on Monday to withdraw their money, after regulators seized what was once one of the largest mortgage lenders in the United States. At a branch at IndyMac’s headquarters, customers began arriving at 4 a.m., five hours before the doors opened.

Some wags have blamed Charles Schumer’s less than reassuring comments for the trickle of funds out of IndyMac in the days prior to its demise. Of course, it takes a good Northern Rock-style FAIL to bring ‘em out in droves.

From WSJ:

WASHINGTON—The Treasury Department is “not talking about nationalizing” struggling mortgage giants Fannie Mae and Freddie Mac, according to a person familiar with the administration’s thinking.

In an unusual move, Treasury Secretary Henry Paulson issued a written statement Friday saying that the Bush administration’s “primary focus is supporting Fannie Mae and Freddie Mac in their current form.”

The person familiar with the matter said the statement was intended to discount reports suggesting that the administration is considering a plan to place one or both companies in a “conservatorship”—in effect, taking them over—if their problems worsen.

(thx to Philippe for the pic suggestion)

Such harsh verbiage from Hammerin’ Hank has been part of what brought TEH PAIN into the market today; we’ve visited territory below 11000. The bonds are less of a visit to the craps table than the stocks if you think there will be a bailout anyway. I don’t think the gold traders believe his hype one bit.

And you thought Countrywide’s Angelo Mozilo won friends and influenced people just with those blindingly white teeth and crazy dark tan. Looks like Senators just might have been trading discounts for bailouts and who knows what else.

Check out this WSJ article.

I was emailed this lol by Jim Swift (thanks!):

I’m surprised Ceiling Cat didn’t drop in to check out this map of fail hotspots.

Bernanke spoke yesterday at Columbia b-school on the relative levels of mortgage fail in different areas of the US, differing causes, and what can be done to stop it. He pointed out that epic mortgage fail in areas such as the Midwest is more job-related, while in the South and West it’s more likely in cases where someone is suddenly $100K+ underwater on some no-doc ARM that readjusted or something. And, of course, he wants the FHA to help distressed borrowers, Congress to give more latitude to Fannie and Freddie, and those lenders to raise capital.

“Doing what we can to avoid preventable foreclosures is not just in the interest of lenders and borrowers. It’s in everybody’s interest,” he said.

Clinton, Obama and McCain have been climbing all over each other this week proposing various homeowner bailouts. Lolrus was unavailable for comment, but one can speculate he would just like to have the bucket back when they are done.

Fed cuts discount window rate a quarter point, says go ahead and bring on a wide variety of collateral, we’ll take it.