The U.S. has been dishing out the bailout funds at a truly stunning pace. It wasn’t too long ago when Fannie Mae and Freddie Mac received those first capital infusions. Since then, so much money has been doled out that it’s difficult to follow who got what money, and who the next recipient of government funds is going to be.
I want to take a look back into some of the specifics of the bailout, and where they’re at today.
Being that I mentioned Fannie and Freddie already, let’s start there. The GSE bailout package gives the U.S. government the option to provide cash in exchange for preferred shares. The “limit” on the investment was supposedly set at $200 billion, but as mentioned in previous issues of Bourbon and Bayonets, there was no real limit. That was the “estimated” amount figured into the equation.
We at Oxbury Research have been open about our beliefs regarding this transparent ponzi scheme since the beginning. As just mentioned, we’ve denounced their so called limits, and stated on several occasions that the funding needed would exceed the funds estimated for use.
Recently we got our first look into what kind of mess we are looking at with Fannie and Freddie. Fannie Mae reported earnings and they weren’t pretty. The GSE reported a record net loss of $29 billion. Now if Freddie has similar numbers, we are looking at in excess of a quarter of that $200 billion already gone to fairy land.
The problem is that the housing market, and the paper that backs it, has yet to his hit bottom. With the massive layoffs and rising unemployment, we must consider the prime mortgages that are now going to go into default. We have to look beyond the obvious affects of the subprime housing market and take a deeper look into the ripple effects that this credit crisis and economic downturn will have.
It won’t be long until the $200 billion mark is met and then exceeded. I’m sure when Joe Six Pack realizes that $200 billion was only an estimate, he’ll feel that he had a fast one pulled on him. I imagine that Joe won’t be too happy about that.
Price check on isle AIG
AIG is living proof that the figures put to these bailouts were derived on Fantasy Island, and the only people who believe them happen to be residents of this particular isolated land mass.
It didn’t take long for regulators to dump their initial claims of a $123 billion bridge loans, and replace it was a package consisting of $218 billion. But what’s $95 billion these days?
About $40 billion of that will come from the $700 billion put towards the Treasury Asset Relief Program (TARP), but more on that shortly. This will allow AIG to receive a lower interest rate than the rates set for the bulk of the initial loan, but I promise you the train doesn’t stop there. This story is another to be continued…
The real bailout
Nov. 10 (Bloomberg) -- The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.
Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn't require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.
This money comes from a wide range of lending facilities used by the Fed. Of the 11 lending facilities used, eight were created within the last 15 months. Some of these facilities include the TARP, Primary Dealer Credit Facility (PDCF), and the Term Lending Securities Facility (TSLF).
What exactly are these lending facilities? They are like a parking lot for bad assets. The troubled entity can go to these facilities and exchange their toxic assets for short term lending. The banks and institutions that have access to these facilities essentially have access to short term funds at a much lower interest than the market would set otherwise. They also have the ability to roll over these short term loans for, well, for as long as they need.
Since the changes (specifics of these changes can be found in prior issues of B&B) in the standards these facilities use, especially the TSLF, Fed lending has increased 140%. This happened in just seven weeks.
Just like the growth in Fed lending, the costs of this bailout are amounting quickly, and I’m only referring to the nominal costs. The effects this creation of money and credit will on our economy will be spectacular indeed.
I was only able to touch on some of the issues surrounding the credit crisis bailout. There have been significant developments regarding our predictions for bailouts of Detroit, muni debt markets, credit card debt, and auto loan debt. There are still several credit land mines that have yet to be stepped on. I will be covering these more extensively in upcoming issues of Bourbon & Bayonets.
Remember that we at the Oxbury Research are here to give you analysis of the credit crisis that you won’t hear elsewhere. We give it to you raw and straight. Our track record of spot-on analysis and ability to predict these events long before they actually occur presents credibility, but more importantly, it presents financial opportunity before the masses catch on.
Read more Stockhouse articles by Nicholas Jones