Trade Deals versus "Free Trade" Deals

Dean Baker asks the big question and his answer nails it.

Dean Baker With the Big Question

Are Ben Bernanke and Henry Paulson crony capitalists?

Dean Baker on Larry Summers

Baker writes about Summers, who is rumored to be under consideration for the position of Treasury Secretary in the Obama Adminstraton:

I have nothing against Larry Summers, but I think there is some sense to having people evaluated based on their job performance. Larry Summers thought the stock bubble was cool, ignored the housing bubble, was in favor of the over-valued dollar...

This track record arguably make Summers one of the main villains in the current economic crisis...

I have no doubt that Summers is very bright, but his brilliance did not prevent him from supporting the policies that got us into this mess. Why do we think that his brilliance will lead him to choose the best policies to get us out of it?

In The Time Tunnel With Dean Baker

We weren't going to bring it up, again, that Dean Baker completely blew the Fannie/Freddie call, until we went to his site, where he is taking credit for making the call correctly!!

To pull this off, Baker takes a time tunnel trip back to September of 2002, when he wrote:

If housing prices fall back in line with the overall rate price level, as they have always done in the past, it will eliminate more than $2 trillion in paper wealth and considerably worsen the recession. The collapse of the housing bubble will also jeopardize the survival of Fannie Mae and Freddie Mac and numerous other financial institutions

He quotes this in a post today that he titles: Fannie and Freddie Go Under: Yes, This Was Predictable

He starts the post off with this humble beginning:

Okay, this is a bit of gloating. After having debated the economists at Fannie and Freddie more than a dozen times over the past six years, I am going to take the opportunity to say that I was right and they are bankrupt.

Now, what really occurred is that Baker completely misunderstood comments made by Paulson just a few weeks back, blew the call and cost anyone who acted on his analysis a lot of money. He wrote:

I have yet to hear any explanation from anyone as to why the government is supporting the share price..

I replied to this with:

I have not seen anywhere a government proposal to give money to shareholders. The Treasury has suggested it may have to buy newly issued stock of Fannie and Freddie to keep them alive, but that is far different than buying shareholder stock.

The next Baker post began with this headline:

Yes, Virginia, Henry Paulson is Bailing Out Fannie and Freddie Shareholders

And, he then wrote, which clearly shows he misunderstood Paulson:

The Treasury is telling the markets that it is prepared to buy shares if the stock of Freddie and Fannie fall below a certain level. Without this commitment, short sellers would see these two bankrupt giants sitting there with positive valuations and push their price very close to zero.

I replied to this nonsense with:

I have not seen, anywhere where Paulson says he wants to bailout shareholders. In fact, Paulson will bailout debt holders, but if it comes to a rescue at the shareholder level where the Treasury comes in to buy newly issued Freddie or Fannie stock, current shareholders will be diluted down to pennies in value, for all practical purposes they will be wiped out. Baker just doesn't seem to get this. It really indicates an alarming lack of understanding of basic finance.

Yes, in some crazy Baker time machine, Baker nailed it. In the real world, it's lucky you are following our analysis instead of Dean "Yes, This Was Totally Predictable--Paulson Is Bailing Out Shareholders" Baker.

Upper End of Housing Market Showing Some Stability

Dean Baker breaks down the latest Case-Shiller housing prices:

[A]n examination of the tiered indices (these show separately the movement of house prices in each city for cheapest third of houses, the middle third, and upper third) indicates a sharp divergence within many markets. In several of the former bubble markets higher end home prices appear to be stabilizing, while prices for homes in the bottom tier continue to fall rapidly.

For example, in Los Angeles prices in the bottom third of the market fell by 3.2 percent in June, while prices in the top third fell by just 0.2 percent. Over the last quarter, prices for homes in the bottom tier fell at a 12.2 percent annual rate, while prices in the top tier dropped at just a 0.8 percent rate.

There’s a similar story in Miami, where prices in the bottom tier fell at a 14.5 percent annual rate over the last quarter, while prices in the top tier fell at just a 4.2 percent rate. Over the last year, prices in the bottom tier have fallen 31.6 percent, which is not much larger than the 25.3 percent decline in prices for houses in the top tier. There’s a similar story in Las Vegas, Phoenix, San Diego, and San Francisco.

Barron's: It's Near Curtain Time for Freddie and Fannie

As we have pointed out a number of times, the Dean Baker contention that the Treasury was bailing out Freddie and Fannie shareholders was utter nonsense . See for example: Freddie Mac Shareholders to Get (Dean Baker) Baked .

Jonathan R Laing at Barron's is preparing the obituaries, right now:

IT MAY BE CURTAINS SOON FOR THE MANAGEMENTS and shareholders of beleaguered housing giants Fannie Mae and Freddie Mac. It is growing increasingly likely that the Treasury will recapitalize Fannie and Freddie in the months ahead on the taxpayer's dime, availing itself of powers granted it under the new housing bill signed into law last month. Such a move almost certainly would wipe out existing holders of the agencies' common stock, with preferred shareholders and even holders of the two entities' $19 billion of subordinated debt also suffering losses...

Heaven knows, the two government-sponsored enterprises, or GSEs, both need resuscitation. Soaring mortgage delinquencies and foreclosures have led the companies to gush red ink for the past four quarters, and their managements concede the outlook is even grimmer well into next year...

Similarly, the balance sheets of both companies have been destroyed. On a fair-value basis, in which the value of assets and liabilities is marked to immediate-liquidation value, Freddie would have had a negative net worth of $5.6 billion as of June 30, while Fannie's equity eroded to $12.5 billion from a fair value of $36 billion at the end of last year. That $12.5 billion isn't much of a cushion for a $2.8 trillion book of owned or guaranteed mortgage assets.

What's more, the fair-value figures reported by the companies may overstate the value of their assets significantly. By some calculations each company is around $50 billion in the hole...

Amazingly, shares of Fannie Mae (ticker: FNM) and Freddie Mac (FRE) have lost around 90% of their value in the past year, but Fannie still is trading at $7.91, and Freddie at $5.88 , which means that Baker has a lot of cult like followers, or there are a lot of other clueless investors out there.

Laing BTW reaches the conclusion of a $50 billion combined negative net worth because both companies carry on their balance sheets a tax credit entry called "deferred tax assets." These increase Fannie's net worth by $36 billion and Freddie's by $28 billion. They don't represent real cash, but are merely paper credits built up over the years. The worse shape the companies are in, the greater these credits are. To insolvent companies like FRE & FNM, they are meaningless accounting entries.

Freddie Mac Shareholders to Get (Dean Baker) Baked

So much for all those who misinterpreted the statements of Treasury Secretary Paulson, by believing that Paulson said he was going to step in and support the price of Freddie Mac and Fannie Mae stock.

The misinterpretations included a doozy by Dean Baker, who specializes in finding minuscule errors in economic reporting (A pimple on an elephant kind of stuff). No problem finding Baker's errors though, they are like nuclear bombs going off by accident. Chernobyl has nothing on this guy. Baker actually headlined his error after I pointed it out in the comment section of an earlier post he made. The headline on the Baker post:

Yes, Virginia, Henry Paulson is Bailing Out Fannie and Freddie Shareholders

He then wrote:

The Treasury is telling the markets that it is prepared to buy shares if the stock of Freddie and Fannie fall below a certain level.

We responded to his post this way:

I have not seen anywhere, where Paulson says he wants to bailout shareholders. In fact, Paulson will bailout debt holders, but if it comes to a rescue at the shareholder level where the Treasury comes in to buy newly issued Freddie or Fannie stock, current shareholders will be diluted down to pennies in value, for all practical purposes they will be wiped out. Baker just doesn't seem to get this. It really indicates an alarming lack of understanding of basic finance.... Anyone reading Baker's posts, and buying Fannie or Freddie stock based on Baker analysis that the Treasury is bailing out shareholders could very well get baked big time.

The baking is about to began.

In its earnings press release today, Chairman and CEO Richard Syron stated:

We remain committed to raising $5.5 billion of new capital and will evaluate raising capital beyond this amount depending on our needs and as market conditions mandate.

The current market cap of Freddie s $4.2 billion and heading south fast. A raise of $5.5 billion at current levels(The stock is trading at 6.50 per share) would require an offering of approximately 840,000,000 shares. There are currently approximately 647 million shares outstanding. Thus a raise at current levels would require an increase in the number of shares outstanding by approximately 129%.

That's if Syron can pull it off on his own. And, Syron will discount the stock as much as he has to get the deal done, since he doesn't want Treasury to step in and buy stock. If the Treasury steps in, the price could be significantly lower than the current bad news price.

UPDATE: Here's how bad things really are for stockholders: “Either investors are going to be massively diluted given the amount of equity they are going to need or they are going to be nationalized,” Dan Alpert, managing director of Westwood Capital LLC in New York, told Reuters. “Without a larger equity capital base, they are going to be incapable of surviving. We don’t think $5.5 billion even scratches the surface.”

Half-Baked Baker

Dean Baker , whose shtick is bashing the media for poor economic analysis, over at his blog, Beat The Press, has apparently made a doozie of an error, himself.

Over two posts and an additional comment, Baker is either guilty of poor writing, or poor writing and not understanding what the Treasury is attempting to do in the Fannie Mae/ Freddie Mac rescue.

In a post yesterday, Baker wrote:

There is a clear rationale for making good on Fannie and Freddie's bonds... .

But what interest does the public have in protecting the share prices of Fannie and Freddie stock? Don't stockholders understand they take a risk when they buy stock? In this case, the stockholders made a bad investment. They are supposed to lose their money (possibly all of it), right?

I have yet to hear any explanation from anyone as to why the government is supporting the share price...

NPR's "Power Breakfast" did an unbelievably awful segment in which it commented that some conservatives oppose bailing out shareholders as "socialism." What? Huh? Is this Planet Earth? Socialism is about giving tax dollars to shareholders? In which volume of Das Kapital does this appear? Conservatives may oppose the bailout for whatever reason, but handing tax dollars to shareholders does not correspond to any definition of socialism I've ever seen.

I replied to this in the comment section:

I have not seen anywhere a government proposal to give money to shareholders. The Treasury has suggested it may have to buy newly issued stock of Fannie and Freddie to keep them alive, but that is far different than buying shareholder stock.

Paulson was clear on this, here.

Since, socialism refers to various economic and political concepts of government whereby ownership and administration of property and the means of production are controlled by the state, the Treasury buying shares (ownership) and influencing the operations (administration) of Frannie and Freddie, sounds to me like NPR nailed the socialism call..

Late yesterday, Baker posted again with more sloppy writing and confusion:

Yes, Virginia, Henry Paulson is Bailing Out Fannie and Freddie Shareholders

The Treasury is telling the markets that it is prepared to buy shares if the stock of Freddie and Fannie fall below a certain level. Without this commitment, short sellers would see these two bankrupt giants sitting there with positive valuations and push their price very close to zero.

This is as much a bailout as if Treasury just sent a multi-billion dollar check to be
divided among the shareholders. This is exactly the sort of nonsense that Treasury invents so that it can do a bailout without owning up to it. Reporters are supposed to catch this sort of deception and inform the public of what is really going on. Paulson is betting that the U.S. press corps is sufficiently incompetent that the public will not realize that they are being taxed to reduce the losses of Fannie and Freddie shareholders.

--Dean Baker

I have not seen, anywhere where Paulson says he wants to bailout shareholders. In fact, Paulson will bailout debt holders, but if it comes to a rescue at the shareholder level where the Treasury comes in to buy newly issued Freddie or Fannie stock, current shareholders will be diluted down to pennies in value, for all practical purposes they will be wiped out. Baker just doesn't seem to get this. It really indicates an alarming lack of understanding of basic finance.

Further, this particular part of his post :

The Treasury is telling the markets that it is prepared to buy shares if the stock of Freddie and Fannie fall below a certain level

is just total nonsense. Treasury has never ever said they would step in to buy stock if the share price of Freddie or Fannie drop to a certain level.

At best, in the following ,we can possibly say that only the sloppy writing comes in, when Baker states the Treasury "...is prepared to buy shares if the stock of Freddie and Fannie fall below a certain level..." He does not state at all that the Treasury is only going to buy newly issued shares from the Treasury. I wonder if he really understands this? His writing can clearly lead to the impression that the Treasury may well go into the open market to buy stock, which is completely not the case.

Anyone reading Baker's posts, and buying Fannie or Freddie stock based on Baker analysis that the Treasury is bailing out shareholders could very well get baked big time.