Custom Search

Saturday, September 13, 2008

The Suprime Mortgage Crisis Blues

Absolutely BRILLIANT!

[ via immobilienblasen who got it from Hedge Fund Post ]

Friday, September 12, 2008

Question: You Ever Get Paid for an EPIC FAIL?

[ via Econompic ]

I've never been paid for an EPIC FAIL. You?

Unbelievable. F*CK.

This is called: 'heads-I-win; tails-you-lose' executive compensation.

“… if you make compensation all upside and no downside that will affect the executive's assessment of risk. It will make it clear to him that he can easily offload the risk onto shareholders. It's heads they win, tails we lose.” –Nell Minow, testimony to U.S. House Committee on Oversight and Government Reform


Between 1993 and 2007, Mr. Fuld took home about $466 million in compensation, including base salary, bonuses, long-term incentive plan payouts and the value of stock options he exercised. That’s according to calculations from Equilar, an executive compensation research firm.

Baltic Dry Index: Smashed, Global Demand Falling

The Baltic Dry Index (BDI) was the last refuge of the last few Bulltards. The argument went something like this: “The US may be in trouble, but the rest of the world isn’t. Look. The Baltic Dry Index is still in an uptrend signaling strong demand overseas.”

The Baltic Dry Index was an integral part of the global Decoupling Theory. In December of 2007 I argued it was nothing but GARBAGE. Simplified:

“This is a global economy. This is a global credit bubble. This is a global credit crunch. Therefore, the consequences will be GLOBAL.”

Nouriel Roubini was arguing the same as early as 2006: Recoupling rather than Decoupling: the Forthcoming Contagion to China, East Asia and Emerging Markets

A falling Baltic Dry Index will also result in falling commodity prices. Those hoping for a resumption of the commodity Bull are going to get nothing more than a bounce or two. This party is over.

Dollar Rises to One-Year High Against Euro on Growth Outlook: “The currency will slide 2.6 percent to 78 U.S. cents by year-end because a slump in the Baltic Dry Index, a measure of shipping costs for commodities, signals demand for the raw materials Australia exports is waning, said Koukoulas.”

Soybeans Rise on Speculation Shipping Cost Drop May Spur Demand: “The Baltic Dry Index of costs for international trade routes shed 133 points, or 2.7 percent, to 4,893 points, according to the Baltic Exchange in London yesterday. That was the 17th straight decline and marked a 46 percent slide for the year.”

Shipping Costs Signal Aussie Dollar to Drop, TD Securities Says: “The currency will slide 2.6 percent to 78 U.S. cents by year-end because a slump in the Baltic Dry Index, a measure of shipping costs for commodities, signals demand for the raw materials Australia exports is waning, said Stephen Koukoulas, London-based head of global foreign exchange and fixed-income strategy for TD, a division of Canada's Toronto-Dominion Bank.”

China's Stocks Retreat; Merchants Bank, Zijin Mining Decline: “China Cosco, the country's largest container line, slumped 9 percent to 12.26 yuan. China Shipping Development Co., the nation's biggest oil carrier, fell 5.9 percent to 11.10 yuan. The Baltic Dry Index tracking transport costs on international trade routes fell 4.4 percent to 5,026 points, the lowest since March 9, 2007, according to the Baltic Exchange in London.”

Related Posts:
Dollar Smile, Global Decoupling, Oil Super Spike and Yields
The Dollar Smile Theory, Overbought Euro
The Dollar Smile Theory
Oil and Global Decoupling Theory
Global Decoupling Theory, Correlation Contagion
The Global ‘Decoupling Theory’ is Garbage
Asia Tanks

Lehman: Will Get Sacrificed, No Bailout

“We've learned that no dealer's going to fail.” –Julian Mann, First Pacific Advisors

Lehman doesn’t stand a chance here.

These guys are going to get sacrificed…

When you’re not big and bad enough, you don’t get taxpayer money…

Paulson and Bernanke will no doubt use Lehman (LEH) as an example. Somebody has to die to “manage the expectations” of the rest of the rabble. It’s the whole moral hazard thing. Somebody’s has to get whacked here or the market might as well assume everybody gets a free pass.

Lehman No Bear Stearns as Money Markets Show No Panic (Update1): “Rising speculation that Lehman Brothers Holdings Inc. may fail is generating less concern among investors than when Bear Stearns Cos. imploded in March.

Unlike the days leading up to the forced sale of Bear Stearns to JPMorgan Chase & Co., volatility in the money markets remains relatively muted. The difference between what the U.S. government and banks pay to borrow in dollars for three months, the so-called TED spread, rose 13 points in the past two weeks to 123 basis points, compared with an increase of 38 basis points to 160 basis points in the period leading up to Bear's failure.

Investors are showing less fear after the Fed set up special lending facilities following the Bear Stearns bailout, giving securities firms the same access to its cash as commercial banks. The ability to tap the Fed for funds means financial troubles at one investment bank are unlikely to bring down others.”

Lehman's Fuld Races to Sell Firm as Fed Balks at Deal (Update2): “Lehman Brothers Holdings Inc. Chief Executive Officer Richard Fuld is seeking buyers for the investment bank amid signs that the U.S. government may balk at providing the funding that enabled Bear Stearns Cos. to sell itself and avoid bankruptcy.

Fuld, who built Lehman into the biggest U.S. underwriter of mortgage securities during his four decades at the firm, was pushed toward a forced sale after talks about a cash infusion from Korea Development Bank ended, sparking a 70 percent drop in the firm's market value during the past three days. Unlike when JPMorgan Chase & Co. took over Bear Stearns, the Federal Reserve and Treasury aren't likely to put up money for a purchase of Lehman, people briefed on the matter said yesterday.

Bankers from other firms were reviewing Lehman's books yesterday, according to people with knowledge of the situation, and a deal may be announced before Asian markets open Sept. 15, one of the people said. The New York-based investment bank announced the biggest loss in its 158-year history on Sept. 10, as devalued real estate assets led to $5.6 billion of writedowns in the third quarter.”

Yesterday, equities started to rally BEFORE the “Bank of America is in talks to buy Lehman” rumor hit the tape. Macroman, in a A Damned Shame noticed the same damn thing: “Per the usual, someone got wind of it beforehand, leading to the by-now de rigeur spike in the SPX before the news hits the tape.”

It is actually quite improbable that Bank of America (BAC) would touch LEH. Think about it. BAC is still trying to digest their really really poorly timed and priced acquisition of Countrywide Financial. BAC also has seriously dangerous exposure to all the same things LEH is exposed to. They won’t double up on them. They can’t.

I sold ES DEC08 (S&P 500 futures contract) after the close. In Korea to Buy Lehman I shorted ES then too. Worked then. Should work again now.

I’d put up a chart of LEH, but what’s the point?

I said Bear Stearns is Dead, Lehman is Probably Next. That was in March.I took a closer look at LEH in Lehman Put Open Interest: Just Like Bear Stearns on June 2nd. I knew then that LEH was dead for sure. The Wall Street Journal (WSJ) ended up quoting me on that post: Following the Bear’s Tracks.

The Lehman Story:
Desperate Lehman Turns to South Korean Military Fund
Lehman To Be Acquired by Tooth Fairy
Korea to Buy Lehman
Sallie Mae: Suspicious Put Open Interest
Lehman: Will Slowly Sell Itself Off
Lehman: Death Spiral?
Banks, Lehman: Busy Lying and Raising Funds
Lehman Put Open Interest: Just Like Bear Stearns
Bear Stearns is Dead, Lehman is Probably Next

Thursday, September 11, 2008

The Death of OPEC?

Could this be the death of OPEC?

Saudis Vow to Ignore OPEC Decision to Cut Production: “Hours after suffering a rare setback in a negotiating session at OPEC’s headquarters, Saudi Arabian officials assured world markets on Wednesday that they would ignore the wishes of other cartel members and continue to pump plenty of oil.

The late-night bargaining session ended early Wednesday morning with a surprise declaration that OPEC would cut production to shore up sagging prices. Saudi negotiators publicly endorsed that position, but then spent much of Wednesday privately spreading the word that they did not feel bound by it.”

I guess Hugo Chavez just got told and so did Iran.

“Analysts say they believe that Iran and Venezuela, for example, cannot afford prices below $100 a barrel as they seek to project power in their respective regions.”

Why can’t they survive on sub $100 dollar oil?

“Some countries are carefully managing their oil windfall, while others are spending freely with the expectation that prices will remain high.

Another group, composed of OPEC’s traditional price hawks, increasingly needs high prices to finance a wide range of social and military policies.”

Iran and Venezuela will most assuredly face serious social unrest within 12 – 24 months as the government is forced to cut social programs, raise taxes and implement inflationary policies…

“The Saudi view is that lowering prices moderately now will shore up the world economy and prevent a recession that would cause oil prices to collapse.”

The Saudi’s aren’t economically illiterate like the clowns from Venezuela and Iran. The House of Saud tends to send their sons and the political elite overseas to some of the most prestigious economic and business schools around the globe. So they understand the cross elasticity of demand, substitution and substitution effect.

The Saudi's also understand "giant global credit crunch" while Hugo Chavez never completed school and shouldn't be allowed to tie his shoes unsupervised.

The Saudi’s have definitely noticed the pick up in chatter on “energy independence”, “renewable energy” and “nuclear energy”. While they probably snicker at everything from “corn ethanol” to the PickensPlan, rather than take any chances, they’ll just let oil slip low enough to make these plans fade from public interest…

Remember, there is no actual oil shortage. Supplies and capacity are both adequate.

This brings me back to my previous post: Smashing the ‘Perpetually Growing Oil Demand Myth’.

[Hat Tip to CJ]

Smashing the 'Perpetually Growing Oil Demand Myth'

If you believe that demand from India and China will send the price of oil and commodities to “infinity and beyond” you’ll end up losing your shirt and your sanity.

Already car sales are falling in both India and China. For India, this is already the second month in a row. For China, this is just the first. For both, things are about to get much much worse.

The per capita income for China is about: $5292 (IMF, 2007 est.)*
The per capita income for India is about: $2659 (IMF, 2007 est.)*

Cars are unaffordable luxury items for all but the richest percentiles in these countries, and that’s with state subsidies. That is rapidly changing.

In Oil drops on Subsidy Cuts in China, India, Malaysia, Taiwan I argued: “This is the catalyst that will finally burst the oil bubble. India, Malaysia, Indonesia and Taiwan have increased fuel prices and reduced subsidies this year. This will have an immediate effect on fuel consumption in these nations because they really are marginal consumers and are therefore the most price sensitive.”

Since then oil specifically and commodities in general have gone into cliff diving mode…

In Dollar Smile, Global Decoupling, Oil Super Spike and Yields I argued:

“Increased demand from developing nations won’t drive oil much higher. Developing nations are the new marginal consumers. That is to say they are the most price sensitive elements of oil demand. For first world nations oil demand is very inelastic. For developing countries oil demand is far more elastic. That means for every $1 increase in oil, more demand will be choked off in developing countries than in first world countries.

Translation: Long before high oil prices cripple the SUV driving commuter making $48 201 (2006 US median annual household income) the Chinese factory worker making about $7 700 (2006 Est.)* or the Indian worker making $3 800 (2006 Est.)* will have given up on certain consumer amenities.

It is a serious mistake to assume that commodity prices at these levels won’t have a serious affect on these developing nations.”

China August Car Sales Fall, First Decline in 3 Years (Update2): “China's passenger-car sales fell in August for the first time in more than three years as the Beijing Olympics and a slumping stock market prompted drivers to delay purchases.

Sales of passenger cars, sport-utility vehicles and multipurpose vehicles totaled 451,300, the China Association of Automobile Manufacturers said in an e-mailed statement today.

Demand for cars in the world's second-largest vehicle market cooled as inflation neared a 12-year high and a stock market slump reduced consumers' spending power. Carmakers including General Motors Corp. and Toyota Motor Corp., the world's two biggest automakers, have set up factories in China to offset slumping sales in the U.S., Japan and Europe.”

India Car Sales Fall for 2nd Straight Month on Rates (Update2): “India's passenger car sales declined for the second month in August as higher loan rates hurt demand for hatchbacks made by Maruti Suzuki India Ltd. and Tata Motors Ltd.

Sales in August fell 4.4 percent to 94,584 from 98,893 a year earlier, the Society of Indian Automobile Manufacturers said in a statement in New Delhi today. Car sales in India declined for the first time in more than 2 1/2 years in July, according to data compiled by Bloomberg.

Inflation near a 16-year peak and loan rates that have almost doubled in the past five years have squeezed consumer spending in India. The automakers group last week cut its growth forecast for the year to 10 percent from as much as 13 percent it predicted earlier this year.”

Even at $100 a barrel, prices have the effect of crowding out the marginal consumer. In this case, the cost of oil rises just high enough such that it becomes unaffordable to the marginal consumer. The marginal consumer happens to be almost everybody NOT in the first world. Basically prices will settle just high enough to wipe out any consumer surplus for these consumers and thereby severely limit demand to the highest socio-economic echelons in those countries. That level is most assuredly below $100 a barrel.

Below are a few of the important economic concepts that should prevent you from falling for all the hype about “perpetually growing demand” and “constantly rising prices”:

Marginal Demand
Income Elasticity of Demand
Price Elasticity of Demand
Cross Elasticity of Demand
Price Elasticity of Supply
Supply and Demand

* Astute readers may notice a discrepancy in my ‘per capita income numbers’. They are from two different sources, one from the IMF and the other from the CIA Factbook.

Really Scary Fed Charts About to Get Crazy Scary

“This could be the mother of year-ends. The markets will need extraordinary actions to get through it.” –Brian Sack, Macroeconomic Advisers

“If banks are unwilling to lend to other banks, then they are unwilling to lend to you and me.” –Stan Jonas, Axiom Management Partners

Once a month I update and add to a regular series of posts I call Really Scary Fed Charts.

Although I won’t update the charts until September 15th when the data comes out, I can tell you right now that going forward these charts are about to go from just “really scary”, to “crazy scary”.

Fed May Expand Funding Aid to Banks in a ‘Mother of Year-Ends’:The Federal Reserve may have to increase the cash it provides to banks and brokers, already a record, to help them balance their books at the end of the year.

Six bank failures in the past two months and rising concern about Lehman Brothers Holdings Inc.'s capital levels pushed lenders' borrowing costs to near a four-month high yesterday. They may climb further as companies rush for cash to settle trades and buttress their balance sheets at year-end.

One option is for banks and brokers to increase the loans they take out directly with the Fed; the central bank reports on the figures today. Officials could also offer options on its biweekly loan auctions or introduce special repurchase agreements to straddle the end of the year, economists said.”

Already about half the $800 billion Federal Reserve balance sheet is spoken for through the alphabet soup of liquidity facilities: TAF, TSLF, and PDCF. The Fed is fast running out of options and money.

This year, the Grinch almost certainly will steal Christmas...

The Really Scary Fed Charts Series:
1) Really Scary Fed Charts, Why Bernanke Will Furiously Cut
2) Fed CHANGES Really Scary Fed Charts
3) Really Scary Fed Charts: MARCH
4) Really Scary Fed Charts: APRIL
5) Really Scary Fed Charts: MAY, False Alarm?
6) Really Scary Fed Charts: JUNE, ‘Just’ 1% of GDP Now
7) Really Scary Fed Charts: JULY, More of the Same

Wednesday, September 10, 2008

Gold, Oil, PMs: More Hedgies Get Whacked

More commodity hedgies get whacked:

RK Capital Hedge Funds Lost Up to 30% in August as Metals Fell: “RK Capital Management LLP, the metals hedge-fund firm co-founded by Michael Farmer, lost as much as 30 percent last month amid falling cooper and aluminum prices, according to an investor with the firm.

The declines cut the combined returns of the firm's five funds to about 2 percent this year, said the investor, who asked not to be identified because the information is private. Red Kite Metals, the company's biggest fund, dropped about 40 percent, bringing this year's loss to as much as 7 percent.

The London Metal Exchange Index of six industrial metals fell 6.6 percent last month and is down 3.6 percent in 2008 as the slowing global economy cut demand for materials such as lead and zinc. Ospraie Management LLC, the New York-based commodity hedge-fund firm run by Dwight Anderson, said last week it will shut down its biggest fund after it lost 39 percent this year.”

Expect an ass-kicking climax of forced liquidation when oil pounds down through $100 and when gold slices down through $780.

The technical picture for both oil and gold can be described as ‘weak’ and ‘precarious’. Granted, both could bounce wildly off of support around here, but that would require a pretty large catalyst. I don’t see one.

Forget about oil demand from the BRIC countries. The whole globe is grinding to a halt. Believe it.

Forget about inflation. There has never been in the history of the world an inflationary run while land prices were declining. The amount of debt being destroyed as the monster of a debt bubbles implodes will suck down all asset prices and just absolutely collapse the velocity of money.

Factor in some serious de-leveraging by every single kind of market participant, and there is no way commodities can resume their ‘secular Bull market’ for years to come.

Take a look at copper for example. Copper just smashed through a multi-year trend line after putting in a long topping formation. Since 2006 prices have been hitting the same highs and getting rejected. This break down is of utmost importance. Game over.

I’m firmly in the deflationist camp.

Still Short Commodities as the Hedgies Puke

DUG had an important break OUT and UP, clearing major resistance and the declining 200 day EMA. This will drag all moving averages (blue, red and green) into the most Bullish orientation possible, where all the shorter ones are above a positively sloped 200 day EMA.

Up volume (black) completely trumps down volume (red). This leads me to believe that energy (XLE, grey area) will continue to slide.

Expect DUG to stall around the $48 to $52 area and consolidate before picking a direction. DUG is overbought, but momentum seems to be building (MACD).

SMN had an important break OUT and UP, clearing major resistance and the declining 200 day EMA. This will drag all moving averages (blue, red and green) into the most Bullish orientation possible, where all the shorter ones are above a positively sloped 200 day EMA.

Up volume (black) completely trumps down volume (red).

Expect SMN to stall around the $50 area and consolidate before picking a direction from there. SMN is overbought, but momentum is clearly building (MACD).

The original position was initiated around $27 on both SMN and DUG. As both ETFs stalled around resistance in the $37 area, that position was cut in half. After hurricane Gustav missed all things vital in the gulf that position was sized back up to full.

Prices are set to test $100. I don't expect the level to hold. Too many hedgies bet the farm on the oil super spike, peak oil theory... The margin clerks will be calling some serious chips.

As the hedgies continue to puke, I will remain short commodity intensive equities through these and other ETF's.

Follow this Trade:

Tuesday, September 9, 2008

The US Gets Riskier

“The bailout of Freddie Mac and Fannie Mae is weakening the balance sheet of the U.S. and that is causing a deterioration of creditworthiness. The market is anticipating there might be more bailouts.” -Mehernosh Engineer

Nothing in life is free… especially the world’s largest bailout.

U.S. Treasury Credit-Default Swaps Increase to Record, CMA Says: “The cost of hedging against losses on Treasuries rose to a record on concern the U.S. government faces higher liabilities because of its rescue of mortgage companies Fannie Mae and Freddie Mac, credit-default swaps show.

Contracts on U.S. government debt increased 3.5 basis points to a record 18, up from 6 basis points in April, according to CMA Datavision prices for five-year credit-default swaps at 5 p.m. in London. Credit-default swaps on German government bonds cost 8 basis points and Japanese bonds 16.5 basis points.

The Treasury committed to invest as much as $200 billion to prevent a collapse of Fannie and Freddie, protecting investors owning more than $5 trillion of their debt and mortgage-backed securities. The U.S. budget deficit will grow next year to $438 billion, the Congressional Budget Office said today, making it harder for President George W. Bush's successor to either cut taxes or increase spending.”

That should make yields start to crawl up and eventually spike. There is a tipping point. Nobody knows where it is, but rest assured, it is out there somewhere.

Lehman (LEH) slammed into $8.00 today. Who knows where it will trade by the close? Another bailout in the making? How much will that cost?

Monday, September 8, 2008

You're Being Lied To!

Fannie and Freddie: CDSs, $1.47 Trillion Triggered

“Derivatives are weapons of mass destruction, carrying dangers that while now latent, are potentially lethal.” –Warren Buffett

Well, this should be fun. Really, equity markets shouldn’t be this excited. By the end of the month a few more dead bodies will float to the surface.

You see, moving Fannie Mae (FNM) and Freddie Mac (FRE) into conservatorship, constitutes a ‘credit event’. Simply put, the rescue counts as if FNM and FRE failed to meet their financial obligations. More importantly, $1.47 trillion in Credit Default Swaps (CDS) just got triggered.

This has NEVER happened before. This is the largest CDS ‘credit event’ ever. Considering that a lot of hedgies thought FNM and FRE could NEVER go ‘bankrupt’, you have to wonder how many of the counterparties are going to be good for their end of the CDS. A favorite game of the hedgies was to write CDSs on these names because they ‘could never fail’.

Fannie, Freddie Credit-Default Swaps May Be Unwound (Update2): “Investors may be forced to unwind contracts protecting $1.47 trillion of Fannie Mae and Freddie Mac bonds against default after the U.S. government seized control of the companies in a bid to bolster the housing market.

Thirteen “major” dealers of credit-default swaps agreed “unanimously” that the rescue constitutes a credit event triggering payment or delivery of the companies' bonds, the International Swaps and Derivatives Association said in a memo obtained by Bloomberg News today. Market makers for the privately traded contracts will discuss how to settle them in a conference call at 11 a.m. in New York, the document said.

A settlement of credit-default swaps would probably be the biggest attempted in the market's decade-long history because Fannie and Freddie are members of the benchmark index of U.S. credit risk, Percy-Dove said. The index comprises the most frequently traded contracts in the U.S.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. An increase indicates deterioration in the perception of credit quality; a decline, the opposite.”

Although a little late, I still recommend everybody read A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation (Click Book image to learn more).

Sunday, September 7, 2008

Fannie, Freddie Press Conference Videos

1) We had to do it. We were tricked. They lied about their capital situations... oh and doing the bailout this way will cost less. No, we don't ACTUALLY know how much it will cost.

2) Conservatorship was the only choice. Monday will be business as usual... oh, and we created a liquidity facility for the FHFA... but don't worry, we don't think they'll have to use it. BTW, the GSE business model was flawed.

3) The Preferred Stock Purchase Agreement will make sure the GSE have a positive net worth.

I enjoyed this little moment of truth from Hank Paulson the most:

"These Preferred Stock Purchase Agreements were made necessary by the ambiguities in the GSE Congressional charters, which have been perceived to indicate government support for agency debt and guaranteed MBS. Our nation has tolerated these ambiguities for too long, and as a result GSE debt and MBS are held by central banks and investors throughout the United States and around the world who believe them to be virtually risk-free. Because the U.S. Government created these ambiguities, we have a responsibility to both avert and ultimately address the systemic risk now posed by the scale and breadth of the holdings of GSE debt and MBS."


I thought that was pretty clear. But then again, I'm pretty sure the Chinese were pretty clear over the phone as well...

See Chinese Central Bank in Need of Capital.

We all watched Bill Gross whine publicly on CNBC to be made whole...

See Bill Gross: Big Bet, Big Fail?

Gaaawdammit Paulson! Now You've Done Us All In.

Video: Karl Denniger from MarketTicker

"The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt." -Bertrand Russell

My Comment:

Oh boy oh boy oh boy. The Bulltards are about to walk into the greatest financial ambush ever...

Tomorrow morning equities are gonna fly, especially financials... for how long, I can't even begin to predict. But one thing is for certain. The crash is going to be spectacular.

Yields are screaming higher across the curve as it suddenly becomes very very clear the US debt has at least doubled, if not tripled and more on this bailout. The US dollar is getting whacked across all major FX pairs. Commodities are catching a bid. This is not good for anybody.

By wiping out both common and preferred shares, Paulson has put one hell of a burden on an already cash strapped FDIC. Regional banks that hold Fannie and Freddie preferred shares as part of their capital are being forced to mark-to-market. Already the FDIC is scrambling to catch the banks that will be crushed by this. This coming Bank Failure Friday should be fun indeed.

S&P 500 futures furiously screamed higher overnight and spent most of their time around 1265. If you recall that was the critical support level that only just broke last Thursday... (The Bear Wedge) Further resistance is around 1300 and 1310.

Treasuries Tumble After U.S. Takes Control of Fannie, Freddie: "Treasuries fell the most in almost two months as the government takeover of Fannie Mae and Freddie Mac gave investors confidence to buy higher-yielding assets.

Notes slid for a second day after the U.S. government seized control of Fannie and Freddie, the two biggest mortgage finance companies, seeking to pull the U.S. housing market out of a recession. The bailout will help the economy and lead to increased Treasury borrowing, economists at Goldman Sachs Group Inc. led by Jan Hatzius wrote to clients."

Paulson Engineers U.S. Takeover of Fannie, Freddie (Update4): "The U.S. government seized control of Fannie Mae and Freddie Mac after the biggest surge in mortgage defaults in at least three decades threatened to topple the companies making up almost half the U.S. home-loan market.

The FHFA will take over Fannie and Freddie under a so- called conservatorship, replacing their chief executives and eliminating their dividends. The Treasury can purchase up to $100 billion of a special class of stock in each company as needed to maintain a positive net worth. It will also provide secured short-term funding to Fannie, Freddie and 12 federal home-loan banks, and purchase mortgage-backed debt in the open market.

Under the plan, the Treasury will receive $1 billion of senior preferred stock in coming days, with warrants representing ownership stakes of 79.9 percent of Fannie and Freddie. The government will receive annual interest of 10 percent on its stake.
As a condition for the assistance, Fannie and Freddie eventually will have to reduce their holdings of mortgages and securities backed by home loans.

Banks and insurance companies have typically purchased the two companies' preferred shares. The Federal Reserve and three other bank regulators said that they will work to "develop capital restoration plans'' with the "limited number'' of smaller institutions that hold Fannie and Freddie stock as a significant portion of their capital."