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To: Keith Feral who wrote (78030)	9/18/2008 1:19:26 PM
From: HerbVic	Read Replies (1) \| Respond to of 213176

I certainly agree with you there, on all points. From the bits and pieces I've been getting, the actual defaults wasn't that big a piece of the overall pie. Most of the initial doom and gloom was with CDOs that had little transparency and something like 3% defaults. From there, the forced write downs, stock drops and ratings mark downs fed the flames of destruction like oxygen and kerosine. But the underlying assets were still a lot more valuable than the cost of acquisition by the government. We can't keep this up. There has to be an end in sight somewhere.

To: Keith Feral who wrote (78030)	9/18/2008 1:44:47 PM
From: inaflash	Respond to of 213176

those investments are worth much more than Paulson has admitted Excellent viewpoint that I haven't heard much in the news. Absorbing GSE isn't without risks, but the government would be on the hook either way (by not acting, expect higher foreclosure rates, more bankruptcies, higher unemployment rates, more volatility, etc.), so taking over GSE was a win/win in my view. On the most optimistic view, if everything is fixed down the road, say 10 years from now, I'm even thinking some common and preferred stockholders that have been nearly wiped out right now might get something. Wouldn't look good if the government turned out to be the raider rather than a white knight. Government failed GSE on two points. First, some implied guarantees (never spelled out) were not fulfilled without taking over (a de facto change in policy). Second, government was increasingly pressuring FNM and FRE to increase mortgage activity and taking on CDO assets, especially as credit was tightening elsewhere (conflict of interest between shareholder interest and government mandate). The current incomplete nationalization (80% stake) and conservatorship leaves the door open that should this be the bottom and housing stabilizes near these levels, these GSEs can be restored to private entities (given the chaos, changes and regulations expected). The $100B government line of credit (it isn't truly a loan taken out yet) might be used up a few billion a quarter, should last a few years. If they hit double digits and can't last 2 years, then total government takeover is guaranteed. Salvaging some value to private investors is important to the government if they ever wish to privatize these entities in the future. Failure to adequately address private interest in this will raise the government cost in all future public/private partnerships.

To: Keith Feral who wrote (78030)	9/18/2008 1:57:35 PM
From: inaflash	Read Replies (1) \| Respond to of 213176

OT: In effect, they have paid absolutely nothing for a $6 trillion mortgage pool with a 10% interest rate. They are bringing in $600 billion a year in interest from FNM and FRE. True to some degree. (These back of the envelope calculations are based on your $6T number that seems in the ballpark.) However the $6 trillion in paper may only be worth 80-90% that and interest rate is probably closer to 5%. If there 10-20% foreclosure on these loans, the government will have paid $600B-$1.2T for property that may wind up being worth half what they paid (especially after disposition costs). This amounts to $300-$600B in REAL losses. It's possible the interest payments over the years can cover and/or recover these losses, and if the numbers aren't as bad, then the government makes out on this deal. If the economy tanks from here and we go into a recession, the REAL losses can potentially go higher. Current foreclosure rates are probably running near 1% overall (highly variable depending on loan instrument and creditor risk), but cumulative rate over the years could wind up going much higher. Also, good loans may be taken out at a faster rate than bad loans (this has probably already happened to some degree). Don't forget, the $6 trillion didn't come from thin air (almost). FNM and FRE borrowed that $6 trillion from the government and are paying interest on those funds to the government.