Officials announced that both giant institutions were being placed in a government conservatorship, a move that could end up costing taxpayers billions of dollars. Treasury Secretary Henry Paulson said allowing the companies to fail would have extracted a far higher price on consumers by driving up the cost of home loans and all other types of borrowing because the failures would "create great turmoil in our financial markets here at home and around the globe."
Mark Zandi, chief economist at Moody's Economy.com predicted that 30-year mortgage rates, currently averaging 6.35 percent nationwide, could dip to close to 5.5 percent. That's because investors will be more willing to buy the debt issued by Fannie and Freddie -- and at lower rates -- since the federal government is now explicitly standing behind that debt.
"Effectively, the federal government has now become the nation's mortgage lender," he said. "This takes a major financial threat off the table."
Futures on all major stock indexes rose about 2 percent in electronic trading Sunday night, another sign of investor relief about the takeover plan
The companies, which together own or guarantee about $5 trillion in home loans, about half the nation's total, have lost $14 billion in the last year and are likely to pile up billions more in losses until the housing market begins to recover.
The Treasury Department said it was prepared to put up as much as $100 billion over time in each of the companies if needed to keep them from going broke, in exchange for senior preferred stock. Treasury will immediately be issued $1 billion of such stock from each company, which will pay 10 percent interest. Further purchases of preferred stock will be triggered if quarterly audits find that the companies' capital cushion is below prudent standards.
The government, which will receive warrants representing ownership stakes of 79.9 percent in each company, is hoping that its moves will reassure nervous investors that they can continue to buy the debt of the two companies.
In a statement, President Bush said, "Americans should be confident that the actions taken today will strengthen our ability to weather the housing correction and are critical to returning the economy to stronger sustained growth."
Democratic presidential nominee Barack Obama issued a statement agreeing that some form of intervention was necessary, and promised, "I will be reviewing the details of the Treasury plan and monitoring its impact to determine whether it achieves the key benchmarks I believe are necessary to address this crisis."
Republican presidential nominee John McCain also voiced support while his running mate, Alaska Gov. Sarah Palin, said that Fannie and Freddie "have gotten too big and too expensive to the taxpayers. The McCain-Palin administration will make them smaller and smarter and more effective for homeowners who need help."
The conservatorship will be run by the Federal Housing Finance Agency, the new agency created by Congress this summer to regulate Fannie and Freddie, a move taken at the same time that Congress greatly expanded the power of the Treasury Department to make loans to the two companies and purchase their stock.
The executives and board of directors of both institutions are being replaced. Herb Allison, the former head of the TIAA-CREF retirement investment fund, was selected to head Fannie Mae, and David Moffett, a former vice chairman of US Bancorp, was picked to head Freddie Mac.
Paulson was careful not to blame Daniel Mudd, the outgoing CEO of Fannie Mae, or Freddie Mac's departing CEO Richard Syron for the companies' current problems. While both men are being removed as the top executives, they have been asked to remain for an unspecified period to help with the transition.
Fannie and Freddie both purchase home loans from banks and then repackage those loans as mortgage-backed securities which they either hold on their own books or sell to investors around the globe. This process provides banks with more money to make more home loans, greatly expanding home ownership.
The impact of the government takeover on existing common and preferred shares, which have slumped in value in the last year, will depend on how investors react to Paulson's assertion that they must absorb the cost of further losses first. Under the plan, dividends on both common and preferred stock would be eliminated, saving about $2 billion a year.
After the Treasury Department's announcement, credit rating agency Standard & Poor's downgraded Fannie and Freddie's preferred stock to junk-bond status, but reaffirmed the U.S. government's triple-A rating.
The Federal Reserve and other federal banking regulators said in a joint statement Sunday that "a limited number of smaller institutions" have significant holdings of common or preferred stock shares in Fannie and Freddie, and that regulators were "prepared to work with these institutions to develop capital-restoration plans."
The Fed released a letter from Fed Chairman Ben Bernanke to James Lockhart, the director of the Federal Housing Finance Agency, in which the Fed chief said he concurred in Lockhart's decision to take control of Fannie and Freddie saying the action "will help ensure the safe and sound operation of the enterprises."
Analysts were split on how much the takeover could eventually cost taxpayers although they all agreed the up-front costs will be substantial, possibly hitting $100 billion as the Treasury is called upon to bolster the capital cushions at both institutions.
However, if the plan does the trick of stabilizing the housing market and home prices stop falling and rebound, then the assets of both Fannie and Freddie should rise in value and the government should be able to sell off the companies and recoup its investments.
But it could take a long time to work through that process given all the headwinds facing housing at the moment from the plunge in home prices to soaring defaults on mortgages which are dumping more homes on an already glutted market. The weak economy has pushed unemployment to a five-year high of 6.1 percent, further reducing demand for homes.
"I think the government will end up having to put in far more money then they are planning right now (given all the problems facing housing) but the important thing is the agencies have been taken over by the government," said Sung Won Sohn, an economics professor at California State University Channel Islands. "That means there will be less panic in financial markets."
Under government control, the companies will be allowed to expand their support for the mortgage market over the next year by boosting their holdings of mortgage securities they hold on their books from a combined $1.5 trillion to $1.7 trillion. Starting in 2010, though, they are required to drop their holdings by 10 percent annually until they reach a combined $500 billion.
In addition, officials said the Treasury Department plans to purchase $5 billion in mortgage-backed securities issued by the two companies later this month, the first of a series of purchases planned by the government in an effort to bolster for these securities, which was badly shaken a year ago when the credit crisis first erupted with soaring defaults on subprime mortgages.
Paulson said that it would be up to Congress and the next president to figure out the two companies' ultimate structure and the conflicting goals they operated under -- maximizing returns for shareholders while also being required to facilitate home buying for low- and moderate-income Americans.
"There is a consensus today ... that they cannot continue in their current form," he said.
Members of Congress will be watching in the coming months to see how the takeover works, but more housing legislation appears unlikely until next year given the few weeks remaining both Congress quits to hit the campaign trail.
Sen. Charles Schumer, D-N.Y. said the intervention was sparked by worries within the Bush administration that foreign governments would stop holding Fannie and Freddie's debt. "This was the prudent course to take," he said.
Senate Banking Committee Chairman Chris Dodd, D-Conn., announced his committee would hold hearings on the takeover to address a number of unanswered questions so that the American people will know "if this unprecedented proposal will help keep mortgages affordable, stabilize the markets and protect taxpayer interests."
Lockhart said that all lobbying activities of both companies would stop immediately. Both companies over the years made extensive efforts to lobby members of Congress in an effort to keep the benefits they enjoyed as government-sponsored enterprises.
Sunday's actions followed a series of meetings Paulson had with Bush and other top administration economic officials with Bush relying heavily on the judgment of Paulson, who was the head of investment giant Goldman Sachs before he joined the Cabinet in 2006.
"It is really an assent to Hank's direction, guidance and judgment," said a senior administration official, who spoke on condition of anonymity to discuss behind-the-scenes deliberations.
Associated Press Writer Ben Feller in Washington contributed to this report.
http://biz.yahoo.com/ap/080907/mortgage_giants_crisis.html
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Oil prices crumble as global economic outlook dims
Tuesday September 2, 8:51 am ET
By Pablo Gorondi, Associated Press WriterOil prices fall as global demand concerns resurface after hurricane worries subside Oil prices tumbled more than $8 Tuesday to levels last seen five months ago as investors shifted their focus from hurricanes in the Gulf of Mexico to slowing global demand.By afternoon in Europe, light, sweet crude for October delivery was down $8.06 a barrel to $107.40 in electronic trading on the New York Mercantile Exchange. The last time prices hovered in that range was in early April before a historic run-up above $147 per barrel. Earlier in the session prices had dropped as low as $105.46
"The market continues to be weighed down by worries of a global economic downturn and slowing oil demand in developing markets," said Victor Shum, an energy analyst with consultancy Purvin & Gertz in Singapore. "Action by OPEC and supply side concerns should put a backstop to any sharp price drop."
The Organization of Petroleum Exporting Countries is scheduled to meet Sept. 9 in Vienna and has indicated it may take action to defend the $100 a barrel level.
Ahead of Gustav, there was some disruption to oil supplies as oil companies shut down production and evacuated facilities. Altogether, about 2.4 million barrels of refining capacity was halted, roughly 15 percent of the U.S. total, according to figures from Platts, the energy information arm of McGraw-Hill Cos. The Gulf Coast is home to nearly half of the nation's refining capacity.
It could be a day or more before oil and natural gas companies can assess the damage to their drilling and refining installations. Louisiana Gov. Bobby Jindal said as much as 20 percent of oil and gas production that was stopped because of Gustav could be restored by this weekend, stressing that it was a rough estimate.
Traders are also keeping an eye on other storms brewing in the region.
Tropical Storm Hanna was predicted to come ashore in Georgia and South Carolina late in the week and could regain hurricane strength later in the day. Tropical Storm Ike formed late Monday in the Atlantic Ocean and may become a hurricane in the next 36 hours as it approaches the Bahamas.
"September is the peak of the Atlantic hurricane season. After Gustav, there are two more now on the radar screen. The storms are likely to provide some upside risks to the oil futures market," Shum said.
In other Nymex trading, heating oil futures fell 20.8 cents to $3.9839 a gallon, while gasoline prices lost 20.44 cents to $2.6498 a gallon. Natural gas for October delivery fell 68.7 cents to $7.256 per 1,000 cubic feet.
In London, October Brent crude fell $2.97 to $106.44 a barrel on the ICE Futures exchange.
http://biz.yahoo.com/ap/080902/oil_prices.html
Mercifully, Gustav caused considerably less damage than everyone feared. Even though the current price of oil still has a hurricane premium thanks to Hannah and Ike, oil has fallen to a new multi-month low.
This is the vindication I was looking for: Oil will easily break $100 by October.
DUG is up 2.57 (7.43%) to 37.18.
Hurricane Gustav is bearing down on the Louisiana coast. It has weakened to a Category 2 hurricane with winds of 110 mph but that doesn't change too much in terms of impacts affecting southern Louisiana.
Watch the latest hurricane forecast.
As of 10 a.m. CDT, Gustav made landfall near Cocodrie, Louisiana. It was centered about 70 miles southwest of New Orleans and about 100 miles southeast of Lafayette, Louisiana. It is moving to the northwest at 15 mph and it will continue in this direction all day today moving into western Louisiana by tonight.
View the Gustav Tracker.
View the projected path.
The northern half of Gustav is now spinning over southeastern Louisiana. In fact, the northern half of Gustav's eyewall is scraping along the marshy coast of southern Louisiana passing south of Houma and eventually south of Morgan City.
Spiraling rain bands will continue to push onshore this morning and will produce tropical storm-force sustained winds (occasionally sustained hurricane-force winds) and easily gust over hurricane force.
The very dangerous water-level rise will continue to grow higher and higher this morning with a 8 to 12 foot surge in the vicinity of landfall. Here's a look at the expected storm surge.
View the current Hurricane watches and warnings and tropical storm watches and warnings.
Remember, don't only focus on the landfall location. Tropical storm-force winds extend 200+ miles from the center and hurricane-force winds extend 70 miles from the center. Wind, surge, and rain impacts will be far reaching. After landfall, the focus will shift from winds and surge to flooding rains and isolated tornadoes.
Tropical Storm Hanna was centered about 40 miles north of the Southeast Bahamas as of 11 am ET. Maximum sustained winds have yet again increased to 60 mph.
A hurricane watch has been posted for a portion of the Bahamas.
View the Hanna Tracker.
Hanna will slide southwest today before making a turn toward the northwest some time on Tuesday. This will take it on a course that will move it over the southeastern and central Bahamas during the next few days.
View the latest projected path for Hanna.
Tropical Storm Hanna has already begun to churn the ocean waters off the Southeast coast. On Sunday afternoon, numerous rescues by lifeguards were carried out along the North Carolina coast and lifeguards along the Georgia coast reported several rip currents. Please be mindful of the dangerous surf during this holiday weekend.
Though Gustav is still on people's minds, coastal residents of Georgia, South Carolina, and North Carolina should all monitor the track and development of Hanna. By Friday, it may be nearing the Southeast U.S. coast.
Elsewhere in the Atlantic Basin, a tropical wave and broad low pressure area has been deemed Tropical Depression 9. It is located halfway between the Lesser Antilles and Africa. Thunderstorm activity has remained with the depression over several hours now.
It may become a tropical storm by later today. It will initially head west-northwest then west over the course of this week. It is forecast to become a hurricane later this week.
There is another tropical wave that has just emerged from the African Coast that has potential for development in the next couple of days.
http://www.weather.com/newscenter/hurricanecentral/update/index.html
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