Economic Headlines

Fannie, Freddie `Insolvent' After Losses, Poole Says

July 10 (Bloomberg) -- Borrowing at Fannie Mae, the U.S. government-sponsored mortgage company, has never been so expensive and it may not get better any time soon.

Fannie Mae paid a record yield relative to Treasuries on the sale of $3 billion in two-year notes yesterday amid concern the biggest provider of financing for U.S. home loans won't have enough capital to weather the worst housing slump since the Great Depression. The company's credit-default swaps show traders are treating the AAA rated debt as if it were five steps lower. Fannie Mae shares tumbled 13 percent yesterday in New York to the lowest level in almost 14 years.

Chances are increasing that the U.S. may need to bail out Fannie Mae and the smaller Freddie Mac, former St. Louis Federal Reserve President William Poole said in an interview. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules, he said. The fair value of Fannie Mae's assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter, Poole said.

``Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer,'' Poole, 71, who left the Fed in March, said in the interview yesterday.

Foreclosures Rose 53% in June, Bank Seizures Tripled

July 10 (Bloomberg) -- U.S. foreclosure filings increased 53 percent in June from a year earlier and bank seizures rose the most on record as deteriorating property values and higher rates on adjustable mortgages forced more people to give up their homes.

More than 252,000 properties, or one in 501 U.S. households, entered a stage of the foreclosure process, RealtyTrac Inc., a seller of default data, said today in a statement. Bank seizures rose 171 percent, the most since the Irvine, California-based company began tracking statistics on default notices, warnings of a scheduled auction and repossessions in January 2005.

``The foreclosure problem is getting worse and will stay with us well into the next decade,'' Mark Zandi, chief economist for Moody's Economy.com in West Chester, Pennsylvania, said in an interview. ``The job market is eroding and homeowners have less equity. Lenders are much less willing to work with you if you've got negative equity, and you're more likely to give up your house if you're deeply underwater.''

Foreclosure activity is the highest since the Great Depression of the 1930s, said Rick Sharga, RealtyTrac's vice president of marketing. Home prices, which fell the most on record in April, according to the S&P/Case-Shiller index of 20 U.S. metropolitan areas, have created a cycle where shrinking equity drives homeowners into foreclosure, which in turn further pushes down home prices, Sharga said.

Bernanke, Paulson outline strategy to make working class pay for Wall Street crisis

Bernanke indicated that the Fed would extend its policy of offering unlimited loans to major Wall Street investment banks. The provision of Fed funds to non-commercial banks and brokerage firms, a departure from the Fed’s legal mandate without precedent since the Great Depression, is part of a policy of bailing out the banking system to the tune of hundreds of billions of dollars. The Fed announced its loan program for investment banks last March when it dispensed $29 billion to JPMorgan Chase as part of a rescue operation to prevent the collapse of Bear Stearns.

In his speech, Treasury Secretary Paulson acknowledged that home foreclosures in 2007 reached 1.5 million and predicted another 2.5 million homes would be foreclosed in 2008. But he made clear that nothing would be done to save the vast majority of distressed homeowners from being thrown onto the street.

Paulson, the former CEO of Goldman Sachs, said that “many of today’s unusually high number of foreclosures are not preventable.” With a callous indifference reminiscent of Marie Antoinette’s “Let them eat cake,” he went on to say that “some people took out mortgages they can’t possibly afford and they will lose their homes. There is little public policymakers can, or should, do to compensate for untenable financial decisions.”

In other words, low-income home owners who were lured into high-interest mortgages by predatory mortgage companies and banks are getting their just deserts! Of course, the Wall Street CEOs and big investors who made billions of dollars by speculating on these loans, creating a vast edifice of fictitious capital that was bound to collapse, are not to be held accountable for any “untenable financial decisions.” On the contrary, they are to be subsidized with hundreds of billions of dollars of credit, ultimately to be paid for by public funds.

Crisis wipes $1 trillion from financial stocks

NEW YORK - U.S. financial companies have lost more than $1 trillion in value this year, and yet another decline on Monday shows concerns aren't going away soon.

Banks and brokerages began the week lower on the same fears that have been proven toxic since last summer in the ongoing credit crisis. The financial sector was hit with a confluence of troubles on Monday: cautious remarks from a Federal Reserve official and new capital concerns at Freddie Mac and Fannie Mae .

The drop in names like Lehman Brothers , Morgan Stanley and Merrill Lynch caused the financial section of the Standard & Poor's 500 index to lose almost $150 billion in value on Monday, according to the rating agency. That means S&P 500's 85 financial components have lost some $1.3 trillion since the sector reached a high last October.

Even more startling is that shares of 35 of the companies, which include insurers, have lost more than half their value so far this year. The financial sector used to be the index's main driver, and many economists believe that the broader market will rise or fall on their health.