I called my Mom yesterday. She said “how are you?…I was worried when I heard that Fannie and Freddie were getting a government bailout and IndyMac went under.”

Put that into perspective. She is turning 78, raising a handicapped “child” who is 50 and two of her grandchildren. Owns her home free and clear and has enough money to live on. And yet she is that aware of what is happening.

No talk about how she’s doing, how the kids are doing, aches and pains…all about F&F and IndyMac.

For people who lived through the depression, as she did, IndyMac going under is significant news as is the F&F story. Though she had no clue who IndyMac was…she being in PA.

She was pretty spot on except when she said “X bank is doing good because my bond there is worth more than the others”. I explained that was because of the 7.5% rate on that bond vs. the 6% rate on the other ones. That concerned me, because she used to know that. Then she asked me what she should do when it matures in 2011

I told her it was a long way away. She said “not really”. I said in this market environment, 3 years away is way too far away for any of us to predict where the markets may be by then, especially the stock and bond markets.

With no need to push rates lower, since no one can buy a house just because rates are lower these days, I think we are going to see interest rates rise. Lowering them is not going to help anything, since the impediment to buying is about cash in hand and credit scores.

Sorry to be off topic, but when phone chats with Mom turn to things not mundane…those thinking this is not BIG news are just being ostriches.

Here’s his take on Fannie Mae.

http://www.nytimes.com/2008/07/14/opinion/14krugman.html?_r=1&oref=slogin

Re the Option ARMS adjustments, I think we will see the biggest adjustments in POA’s between 4 and 5 yrs from date of origination. The peak of the Option ARMs originations was 2006.

http://www.theonion.com/content/news/recession_plagued_nation_demands

Oooph!

Check out the stock price on WaMu today. Down 32%, and the option traders are pricing in a price below $2.20 before Friday.

I think the FDIC shot about 20% of its arsenal on IMB. Food for thought.

That’s a first rate summary on where we find ourselves. I’m glad people are starting to understand this for what it is.

The problem with the GSEs descends from the very model they use. They can only sustain so many defaults before they implode. Given that they were modeled on a 1% default rate, it doesn’t take much to tip this over.

I’m not sure socialization of the mortgage market is going to be healthy for the economy, or even the housing market. At the end of the day, whatever a homeowner will save on interest, he will lose in taxes, overhead, and the inability to originate other forms of debt at working prices.

Also, contrary to popular myth, Uncle Sugar doesn’t have an endless supply of money. Even if we eliminated the Defense Department, we still can’t pay out the Boomers’ retirements on Social Security, much less the far larger Medicare. Add in interest on the existing debt, and you have a government that is going to default on entitlement spending to save its credit rating.

I know people might think that is a nutty prediction, but people also thought it was nutty that the real estate market would ever shift into reverse. Economic reality trumps sugar-plum dreams.

Now, how does the US.gov backstop all the mortgages? Even more pressing, how does the US.gov take on enough mortgage paper to keep the present market from spiraling downward?

In engineering terms, this is what we call “dynamically unstable.” (the more something moves out of equilibrium, the greater the propensity to continue to move out of equilibrium)

If $15B and a stock buyback was all that was needed to fix the financial system, Skeletor would have done this months ago. The problem is in the trillions of dollars and the fact that tens of millions of Americans overbought their home, and there is not a single thing we can do to paper-over that reality.

Now I have to go find Roubini’s proposal.

Sure. Bailing out shareholders creates moral hazard, but so does a bail-out of the GSE bond-holders. In reality it is the buyers of GSE bonds who the most responsible for creating the mess these agencies are in. If Investors hadn’t been willing to fall all over each other to buy Fannie and Freddie debt then the housing bubble wouldn’t have gotten off the ground. Unfortunately, bond investors had no reason to really consider the credit-worthiness of the GSEs since they knew the US government would guarantee the debt.

Is all I am saying is that if the government wants to do some sort of bail-out, they’d be better off helping the shareholders directly. However, the best option is to do no bail-out at all. Investors (both of bonds and equity) need to feel the fear of God for a change, and realize that they really need to take responsibility for putting their money into safe vehicles.

This is what really angered me about the Bear Stearns bail-out. Bear shareholders took a hit, but the customers of the bank were protected. How does this help anything? It is the immoral customers, and bond-holders, of these institutions who are the root of the problem. It is completely irresponsible to choose the institutions we do business with based merely on price, but since everyone knows the government will bail us out, no one cares about whether a given firm is really safe.

Why not get CDs from the lenders offering the best rates, despite the fact those companies are usually the ones with the most trouble? Heck, my wife bought IndyMac CDs earlier this year because she got a great rate! She isn’t even batting an eye due to the bank failure since she knows her money is guaranteed by the government (the totals are far below $100,000). My wife was acting rationally, but it is this type of moral hazard that is the rot at the core of our system. Unfortunately, I haven’t heard anyone talk about trying to rectify this (exept Roubini, maybe).