Monday, July 14, 2008

The Bailout Bonanza Scorecard

(WSJ MarketBeat) The decision by the Federal Reserve and Treasury Department to intervene to shore up Fannie Mae and Freddie Mac is just the latest in a series of high-profile government forays into the markets to restore confidence in the system or prevent an impending disaster (or so we’re assured).

MarketBeat thought it was about time to introduce the Bailout Scorecard, to keep track of all of the situations of late where the government has either committed money directly, offered to commit money, engineered some sort of capital infusion/takeover, or at the least, publicly commented on a private plan to backstop certain assets.

Here, for now, is how the bailout brigade shakes out. If there are any others that MarketBeat is missing, please chime in and we’ll do our best to add it to the list.


One Bailout to Bind Them
Bailout What it Was Why? Who Was Helped Who Paid? Is it Working?
The Entity A proposed “super-structured investment vehicle,” jointly created by several large banks, to buy debt that nobody wanted In the third quarter of 2007, many banks realized that their off-balance sheet funds held scores of bad debts, and they wanted to find a way to offload it into a toxic waste dump Nobody. The fund never came to fruition when most realized it was folly Nobody paid for it; the banks paid by eventually moving the assets from their structured vehicles on their balance sheets It is working in the sense that it did not come to fruition, for the betterment of everyone.
Bear Stearns After the company’s stock slumped and its credit-default swaps exploded, the Federal Reserve intervened, eventually by having JP Morgan Chase & Co. buy the company for $10 a share Bear Stearns was battered by chatter about no liquidity due to massive exposure of bad mortgages on their balance sheet The bondholders of Bear, and arguably, J.P. Morgan, who snapped up the company for a song J.P. Morgan paid $30 billion, with a $28.8 billion loan from the Fed The next target on everyone’s list is Lehman Brothers, but they have survived right now.
The various Fed lending facilities A group of lending facilities, some existing, some new, put together by the Fed that liberalized existing rules as to who could access the Fed’s lending windows Various market spreads widened considerably in December, and then again in March, inhibiting short-term borrowing and the regular functioning of the banking system The short-term financial markets The Fed is lending money that is expected to be repaid Market spreads, indeed, have been reduced
Hope Now Alliance An effort by the government, private lenders and others to restructure mortgages Housing prices have slumped and many homeowners have faced the re-setting of mortgage rates to cost-prohibitive levels Homeowners facing foreclosures Lenders, mostly The program has helped some, but others contend that it is being overwhelmed by the sheer volume of foreclosures. A Credit Suisse report predicted that 6.5 million loans will fall into foreclosure over the next five years, or about 8% of all U.S. homes.
Fannie Mae/Freddie Mac A government-led plan to shore up mortgage guarantors Fannie Mae and Freddie Mac The two companies were seen as being on the brink of insolvency, and together they guarantee $5 trillion in mortgage debt The expectation is for this to alleviate concerns in the mortgage markets The Federal Reserve is expected to lend if necessary, but a giant guarantee of Fannie and Freddie’s debt is most likely to end on the taxpayers’ shoulders Too early to tell.





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