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Fannie Mae Enron?
The Wall Street Journal ^ | Wednesday, February 20, 2002

Posted on 02/20/2002 3:37:22 AM PST by TroutStalker

Edited on 04/22/2004 11:46:12 PM PDT by Jim Robinson. [history]

We were reading President Bush's budget the other day (we know, get a life), when we came across an unusual mention of our all-time favorite companies -- Fannie Mae and Freddie Mac. What we found is a tale we think taxpayers and investors should want to hear.


(Excerpt) Read more at online.wsj.com ...


TOPICS: Editorial; News/Current Events
KEYWORDS: demron; enron; fanniemae
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1 posted on 02/20/2002 3:37:22 AM PST by TroutStalker
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To: Free Vulcan; ken5050; Wyatt's Torch
Uh Oh !
2 posted on 02/20/2002 3:58:46 AM PST by Dukie
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To: Moonman62; Senator Pardek
More derivitives exposure - this time federally chartered companies.
3 posted on 02/20/2002 4:02:43 AM PST by Dukie
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To: sinkspur
sink, what do ya think ?
4 posted on 02/20/2002 4:04:00 AM PST by Dukie
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To: bwteim; razorback-bert
More derivitive worries
5 posted on 02/20/2002 4:09:55 AM PST by Dukie
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To: kylaka;slyfox; copycat
More derivitives problems bump for you good folks.
6 posted on 02/20/2002 4:18:13 AM PST by Dukie
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To: Roger_W_Isom; Dog; Liz
Bump.
7 posted on 02/20/2002 4:19:01 AM PST by TroutStalker
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To: anymouse; Dog Gone; d14truth
Bump.
8 posted on 02/20/2002 4:21:11 AM PST by TroutStalker
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To: TroutStalker
Folks,

Generally speaking this is good news.

When the waves close over the Titanic known as the Imperial Feral Government the human race will have learned a valuable lesson about hubris and government.

We will have smaller government no matter what the liberals want.

Best regards,

9 posted on 02/20/2002 4:29:29 AM PST by Copernicus
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To: Copernicus; Eustace
When the waves close over the Titanic known as the Imperial Feral Government Hmm ... you have hit on a very good metaphor, but may I suggest a clarification - government in collusion with global financial institutions. The self proclaimed " Masters of the Universe" and the regulators up on the promenade deck ready to man the lifeboats while the chumps down in steerage hold the bag.

Bankers and hedge fund mangers first !

10 posted on 02/20/2002 4:40:31 AM PST by Dukie
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To: Dukie;trout stalker
Thanks for ping, Dukie. I caught that article this morning in WSJ, too.
Paragraph six bears rereading regarding nondisclosure of counterparties... and their ability to pay.
As Journal noted "We aren't trying to scare readers here, and perhaps all of these concerns will come to nothing" but it is not a pretty picture.
11 posted on 02/20/2002 4:44:16 AM PST by bwteim
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To: Dukie
Thanks for the ping. If the Federal government had to produce financial statements as required by the SEC for publicly traded companies, it would be rated a "sell" by every analyst. Just with Social Security alone, it is the ultimate Ponzi scheme. Enron is nothing compared to their fiscal malfeasance. I am only 33 but have planned for my retirement by completely excluding SS. If I get it, great, I'll be able to eat at McDonalds once more a month.
12 posted on 02/20/2002 4:48:32 AM PST by Wyatt's Torch
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To: TroutStalker
bump
13 posted on 02/20/2002 4:49:29 AM PST by Tauzero
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To: TroutStalker
Thanks for the bump.......guess Fan and Fred will become part of the corrupt "Enronics" lexicon soon....
14 posted on 02/20/2002 4:53:00 AM PST by Liz
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To: bwteim
You are welcome, bwteim. That phrase:"We aren't trying to scare readers here, and perhaps all of these concerns will come to nothing" evokes the sounds of whistling while walking past the graveyard.

Questions remeniscent of the history lessons surrounding Credit Anstalt are starting to stir.

15 posted on 02/20/2002 4:53:40 AM PST by Dukie
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To: Wyatt's Torch
You're welcome, Wyatt. I've few years on you at 45 but I've adopted the same outlook. The danger is that the falling tide precipitated by such malfesance will swamp all boats.
16 posted on 02/20/2002 4:59:32 AM PST by Dukie
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To: Dukie
If property prices collapse as a result of the Fed induced deflation, we'll just be known as Japan II. I don't even want to imagine the devestation.
17 posted on 02/20/2002 5:12:38 AM PST by Wyatt's Torch
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To: TroutStalker
The government and Congress was warned of this more than five years ago. I believe it was Citizens Against Government Waste that warned them and they did not heed.Our good old efficient government!The Clinton Administration,Ron Brown, Ciscernos and the gang!
18 posted on 02/20/2002 5:12:47 AM PST by gunnedah
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To: all
Understand that this is not "ONLY" $2.6T, but it represents the mortgages of the majority of homes in this country. Fan and Fred going under would cause major economic upheaval. Not that that is avoidable at this time anyway, but there is more at stake here than many realize.

We live in interesting times, to put it midly.

19 posted on 02/20/2002 5:15:56 AM PST by getsoutalive
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To: Dukie
Along these lines - Bankruptcies Soar to Record in 2001
20 posted on 02/20/2002 5:17:37 AM PST by Wyatt's Torch
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To: Dukie
More derivitives exposure - this time federally chartered companies.

Even putting derivitives aside for a minute, I've noticed a sort of "rumbling" in the banking/credit system in general lately. I'm not too detail oriented when it comes to economics, but the big picture isn't looking good.

I'm far from any kind of expert, but I did spend quite a few years in real estate and mortgages and I know the financial and credit aspects of the economy can be a strange animal. It's changed so quickly in just the few years since I've gotten out of it.

I read an article last night that bankruptcy filings are up 19% in 2001. That's pretty dramatic if you ask me, considering "accounts receivable" is considered an asset in accounting terms.

It used to be that when the prime went down, borrowing rates followed within a week reflecting the drop almost verbatim. Over the last year and a half, the fed has dropped about 5 points yet interest rate drops have been nearly none-existent. As a matter of fact, credit card rates are climbing pretty quickly.

People can blame the evil bank execs, but that's juvenile as there will always be someone to sell money cheaper if there's a way to do it. I think they're just having a lot of trouble making ends meet.

21 posted on 02/20/2002 5:17:44 AM PST by AAABEST
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To: AAABEST; Wyatt's Torch
you guys both hit on the bankruptcies increase story. The interest rate spread you mention is indeed related to that problem. The people who can still service their debt have to make up for those who can't.

AAABEST - You seem to be a credit worthy fellow : ))

I'll add you to my flag list for such articles.

22 posted on 02/20/2002 5:29:42 AM PST by Dukie
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To: Copernicus
"We will have smaller government no matter what the liberals want."

Wonder how our 50 'nation states' will do in the Olympics after the breakup of the US? Gold in 'surfing' to Hawaii?

23 posted on 02/20/2002 5:40:28 AM PST by d14truth
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To: All
Doug Noland over at the prudentbear.com website has been covering this and related matters for at least a year....although his weekly 'Credit Bubble Bulletin' sometimes goes over way my head.

But few will be concerned until this thing comes in short of the runway.

24 posted on 02/20/2002 5:47:27 AM PST by cadillac cowboy
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To: Wyatt's Torch
"Just with Social Security alone, it is the ultimate Ponzi scheme."

The only possible 'plan' for keeping Social Security afloat has to include reduced benefits, later benefits, OR a planned reduction in beneficiaries.

Increased taxation will not be an option unless our children are completely 'sold' on being without liberty.

25 posted on 02/20/2002 5:47:30 AM PST by d14truth
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To: TroutStalker
This is couched as an Enron related story which may tend to obfuscate the real message. Enron made unhedged, unlimited, full risk bets on the wrong side of the market--end of story. If Enron had not done that, they would still be sitting in Houston. Maybe top management did not understand the true impact of their bets on the financial condition of the company and that contributed to the problem. But Enron is a relatively limited business story.

This story is not a relatively limited business story. Further, it is a depiction of only a part of the story--the two FM's are a significant part of the mortgage lending market, and the financial hedge market. But the two entities combined are a smaller fraction of the total credit money creation engine. And the two FM's are directly dependent on the remainder of that financial market--credit problems elsewhere could well cause liqudation of a large part of the FM's capital as well as eliminate the credit on the other side of many of their derivative transactions.

The word "insurance" here ought to be stricken--these transactions are insurance only in the sense that they are offsetting bets about financial futures. The term "insurance" under circumstances where the risk is a $350,000 fire and the entity that promises to rebuild the house has three quarters of a billion dollars of assets is a fair description of the relationship because one or ten or fifty simultaneous fires are extremely unlikely and the cost of the fix is quite manageable in terms of the total assets available.

Here, we cannot really quantify the magnitude of the financial obligations that support FM's position that rising interest rates are not a risk nor can we make any assessment of how great the risk is that the other party to the transaction will be unable to perform if the risk hits. Under circumstances where a failure to perform (hypothetically) by JP Morgan on a totally unrealated derivative obligation could bring down the other side of the hedge transaction to which FM looks to support its rate avoidence risk, the entire system is subject to the risk of being brought down by one or two financial events.

Everyone here ought to look up PrudentBear.Com. This week through Friday, there is an article by Doug Noland under "Credit Bubble Bulletin" which is an effort at a college freshman level explanation of the problem. The article is long; the examples tedious; and understanding is difficult unless you have enough basic accounting skills to create T-accounts to follow his analysis. However the article is a basic tool in understanding the magnitude of the problem.

26 posted on 02/20/2002 5:55:19 AM PST by David
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To: cadillac cowboy
I just heard this editorial being mentioned on CNBC. If true, then there is no safe place to put your money. All my 401-k money is in bonds, for example (the “safest” of my choices), the largest holdings are Fannie Mae and Freddie Mac.
27 posted on 02/20/2002 5:59:30 AM PST by rohry
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To: David
I read it every week. Highly recommended. Also, check out FinancialSense Online for easier to understand analysis.
28 posted on 02/20/2002 6:03:46 AM PST by rohry
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To: rohry
Sometimes safety can only be measured by not having your boat sink as far as the others.
29 posted on 02/20/2002 6:06:45 AM PST by bvw
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To: rohry
Alan Greenspan may just be Edward John Smith reincarnated.
30 posted on 02/20/2002 6:15:24 AM PST by cadillac cowboy
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To: bvw
Especially true if your boat is a submarine:

France, India inch towards signing submarine deal

...on the lighter side.

31 posted on 02/20/2002 6:17:43 AM PST by rohry
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To: cadillac cowboy
Alan Greenspan may just be Edward John Smith reincarnated.

The name doesn't ring a bell. Got any links or explanations for us dummies?

32 posted on 02/20/2002 6:21:03 AM PST by rohry
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To: TroutStalker
This is not good. Housing provides a huge chunk of the employment picture, from the actual construction workers to the guys at Home Depot, Walmart, and the restaurants that feed these guys at lunch.

Foreclosures are on the rise by a substantial amount. I'm seeing it in the lower end of the market right now, mainly in first time homebuyer type housing where it takes two incomes to pay the mortgage and one or both have gotten laid off from work.

I've never been through a market collapse like Houston of the 80's and I wonder what it will take for this foreclosure rate to filter on up into the higher income brackets.

An Enron type failure of Freddie and Fannie would be very, very bad for all involved in the Mortage/Real Estate/Building industries.

33 posted on 02/20/2002 6:25:24 AM PST by Rebelbase
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To: rohry
Hint: Captain Edward John Smith.....
34 posted on 02/20/2002 6:30:27 AM PST by cadillac cowboy
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To: rohry
Two words: Precious metals.

They are the only monetary asset that is not someone elses liability.

35 posted on 02/20/2002 6:34:08 AM PST by getsoutalive
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To: cadillac cowboy
Steamships, airplanes ... what's your next analogy?
36 posted on 02/20/2002 6:36:54 AM PST by bvw
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To: Rebelbase
Freddie and Fannie failure would be verrrry bad for anything that we purchase or sell. Monetary collapse. Buenos Aires ring any bells?
37 posted on 02/20/2002 6:38:13 AM PST by meenie
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To: meenie
We are a lot closer to Buenos Aries than the Fed would lead us to believe.
38 posted on 02/20/2002 6:44:39 AM PST by Rebelbase
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To: TroutStalker
Will JP Morgan do an Enron?
39 posted on 02/20/2002 6:46:19 AM PST by lewislynn
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To: getsoutalive
Two words: Precious metals. They are the only monetary asset that is not someone elses liability.

I'm already there. About 30% of my non-401-k money is in Gold and Silver. I have no such choice in for 401-k money, however.

40 posted on 02/20/2002 6:50:34 AM PST by rohry
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To: David
Enron made unhedged, unlimited, full risk bets on the wrong side of the market--end of story. If Enron had not done that, they would still be sitting in Houston. Maybe top management did not understand the true impact of their bets on the financial condition of the company and that contributed to the problem. But Enron is a relatively limited business story.

Or perhaps a more accurate analysis would be that the execs at Enron saw an opportunity to personally cash in (via stock options) by artificially running up the value of Enron, then having themselves and their friends bail out at the peak and leave the suckers holding the bag. In that case, the execs basicly engaged in one of the biggest theft-by-fraud cases in history

It would be interesting to discover what "big names" rode Enron up, then bailed before the crash. I don't think this crash was a mistake caused by stupidity -- it was a looting of value

41 posted on 02/20/2002 6:57:04 AM PST by SauronOfMordor
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To: TroutStalker
Good post, right on target. Anybody remember the S&L scandal? These outfits have already lowered their property appraisal standards by converting to automated valuation models (AVM's), which means that live human being have NOT been inside their collateral or stretched a tape measure around the house. Does it stink, probably!!! The other place to go look is in the area of compensation for the senior staff members at these institutions. Anyone for pork?
42 posted on 02/20/2002 6:57:15 AM PST by pointsal
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To: TroutStalker
Good post. Thanks. I see Freddie Mac is down 3% so far this morning on the news.
43 posted on 02/20/2002 7:06:42 AM PST by rohry
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To: Huck; robnoel
Hey Huck & rob - you may be interested.
44 posted on 02/20/2002 7:25:31 AM PST by Dukie
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To: bvw
"Steamships, airplanes ... what's your next analogy?"

How about?...inching toward the exit.

45 posted on 02/20/2002 7:43:32 AM PST by cadillac cowboy
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To: It'salmosttolate; GEC
Bump for your reading
46 posted on 02/20/2002 7:54:04 AM PST by Dukie
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To: cadillac cowboy
Deadheading -- in the trainman's sense.
47 posted on 02/20/2002 8:00:38 AM PST by bvw
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To: Dukie
"Maybe this time Congress should hold hearings before things go wrong." = It's almost too late
48 posted on 02/20/2002 8:08:01 AM PST by It'salmosttolate
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To: Rebelbase;COB1
I've never been through a market collapse like Houston of the 80's

I was there and lived through it. I can tell you stories, like one of my salesman who walked out of his house into another, because of the change in interest rate and payment. People were moving out and deeding their house to someone in the cemetery, the real estate market in Houston before then was over heated, over priced with sky high interest rates. A friend of mine, who was made redundant at Houston Natural Gas, bought sheets of plywood and hired street laborers and boarded up vacant house for a living. Whole neighborhood were going vacant, I bought a condo that six months before was on the market for $90k for $18, then two months later the one next door sold for $9.

The feds with recovery plans for the S&Ls (I am blocked on the name) actually fouled things up even more, but that is a another set of stories.

49 posted on 02/20/2002 8:12:15 AM PST by razorback-bert
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To: cadillac cowboy
bttt for Noland's Credit Report This could be the mother of all shorts. The head of one of these monstrosities is one Franklin Raines a Clintoid flunky who runs his outfit with a political liberal ethics, bad for business.
50 posted on 02/20/2002 8:16:17 AM PST by junta
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