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Bloomberg – Federal Reserve Chairman Ben S. Bernanke said American International Group Inc. operated like a hedge fund and having to rescue the insurer made him “more angry” than any other episode during the financial crisis.
“If there is a single episode in this entire 18 months that has made me more angry, I can’t think of one other than AIG,” Bernanke told lawmakers today. “AIG exploited a huge gap in the regulatory system, there was no oversight of the financial- products division, this was a hedge fund basically that was attached to a large and stable insurance company.”
Bernanke’s comments foreshadow tougher oversight of systemically important financial firms, and come as President Barack Obama seeks legislative proposals within weeks for a regulatory overhaul. The U.S. government has had to deepen its commitment to prevent AIG’s collapse three times since September as the company accumulated the worst losses of any U.S. company.
The company “made huge numbers of irresponsible bets, took huge losses, there was no regulatory oversight because there was a gap in the system,” Bernanke said. At the same time, officials “had no choice but to try and stabilize the system” by aiding the firm.
AIG is getting as much as $30 billion in new government capital and relaxed terms on its bailout announced yesterday.
In another sign of tighter regulation to come, Bernanke said supervisors should have authority to bar new financial products that may be destabilizing to markets.
Bernanke made the AIG comments in response to a question from Senator Ron Wyden, an Oregon Democrat, at a Senate Budget Committee hearing today in Washington.
BloombergThe financial wreckage of 2008 has left no part of our country untouched. It exposed the bankruptcy of business models employed by mortgage companies, investment banks, and rating agencies as well as the flaws of innovations such as structured finance and credit default swaps. It also highlighted regulatory gaps and failures at almost every level of oversight.
In 2008 Bear Stearns Cos. and Lehman Brothers Holdings Inc. imploded, Fannie Mae and Freddie Mac were placed into conservatorship, mainstay Wall Street firms like Merrill Lynch & Co. Inc. were forced to merge with other companies, and giant institutions such as American International Group Inc. clung to existence on federal life support.
More painfully, too many Americans face the twin perils of home foreclosure and job loss as frozen credit markets signal an increasingly deep economic slowdown.
New York (HedgeCo.Net) – Auto executives stood before Congress yesterday and requested a $25 billion rescue package, pleading that their industry was going under fast. After allocating billions to bailouts in recent months, the auto industry was met with quite a bit of reluctance from many of the same individuals who were all for the $700 billion in handouts to financial firms.
"Detroit’s basic problem is that they created a business model that doesn’t have a snowball’s chance in hell of surviving in a global economy," said Republican Senator Lindsey Graham from South Carolina.
Alabama Republican Senator Richard Shelby agreed, saying that the automakers, aka “failed models,” should just file for bankruptcy.
The hearing was held a day after Senate Democrats proposed the $25 billion in rescue loans. However, the auto industry just happens to be at the end of the line after the government handed out funds to AIG, Bear Stearns and mortgage lenders Fannie Mae and Freddie Mac.
“This is about much more than just Detroit,” Rick Wagoner, head of General Motors, said in his testimony. It’s about saving the U.S. economy from a catastrophic collapse.”
General Motors is seeking approximately $10 billion from Uncle Sam while Ford and Chrysler are asking for about $8 billion and $7 billion respectively.
"While the domestic auto industry has made mistakes in the past, the current problems have been exacerbated by one of the worst economies in nearly three decades," Alan Mulally, CEO of Ford Motor Corp. said in his testimony.
Mulally and Wagoner, along with head of Chrysler Robert Nardelli and Ron Gettelfinger, head of United Auto Workers Union were all part of the team that testified before Congress.
Gettelfinger added, "If one of these companies was to go into bankruptcy, I would almost bet it would take two of them or possibly all three."
Julie Scuderi Senior Editor for HedgeCo.Net Email: julie@hedgeco.net
The Washington Times – A transition adviser to President-elect Barack Obama earned millions of dollars overseeing an office that led a lobbying effort to prevent increased oversight of mortgage giant Fannie Mae, the company at the heart of the ongoing turmoil in the nation’s financial markets, public records show.
The unpaid adviser, Thomas E. Donilon, held several senior positions at Fannie Mae from 1999 to 2005, including vice president of law and policy, at a time when the company’s officers and lobbyists were insisting that now-troubled Fannie’s finances were sound.
In a 2006 report, the Office of Federal Housing Enterprise Oversight (OFHEO) said Fannie Mae lobbyists, whose office was overseen by Mr. Donilon, tried to use their ties to members of Congress to discredit federal regulators through a campaign aimed at securing the release of a U.S. Department of Housing and Urban Development report to discredit OFHEO.
Tehran Times – "We do have to have much more government oversight and involvement than we’ve seen in the last decade or so,” said Waxman, a California Democrat.
“A lot of people didn’t either know what they were getting into or much care because they weren’t going to be the ones holding the bag,” Waxman said in an interview on Bloomberg Television’s "Political Capital with Al Hunt,” airing.
Hedge funds need regulation "to make sure the incentives are right for them and others to do the right thing,” said Waxman. "Certainly we need more transparency.”
His House Oversight and Government Reform Committee will take testimony next month from representatives of hedge funds and from Freddie Mac and Fannie Mae, the biggest buyers of U.S. mortgages.
Gotham Gazette – The turbulent financial market events of recent days demonstrably signal the end of Wall Street as we know it. More uncertainty lies ahead, on Wall Street but also for the national economy. How is this affecting New York and what will it take to get the economy moving again?
Six months ago, a "disastrous foray into financial wizardry" by banks and lenders led us to the sight of the Federal Reserve giving J.P. Morgan Chase $28 billion to take over Bear Stearns. It was thought that this unprecedented action might calm the panic triggered by the sub-prime lending fiasco.
The bursting of the housing bubble destroyed billions of dollars of equity people held in their homes and started to jeopardize millions of mortgages across the country, prime as well as sub-prime. This mortgage meltdown led the U.S. Treasury Department earlier this month to take over the two quasi-public mortgage giants- Fannie Mae and Freddie Mac, which together hold nearly half of the $12 trillion in outstanding mortgage debt in the U.S.
New York (HedgeCo.Net) – Just one day after reaffirming their stance they would not rescue America International Group Inc., the Fed has agreed to lend the collapsing insurer $85 billion in exchange for a 79.9 percent majority stake.
The Fed justified the move, stating “a disorderly failure of AIG could add to already significant levels of market fragility.” The two-year loan will assist AIG in “meeting its obligations,” although the government has the right to halt dividends to common and preferred stockholders. Parts of the company may also be broken off and sold to pay off the debt.
The move came after a whirlwind week of plunging share pricing and other Wall Street firms trying to stay afloat. With the recent bankruptcy of Lehman Brothers and Bank of America’s purchase of Merrill Lynch hanging in the background, AIG looked to be another casualty of the credit crunch.
The federal government had urged AIG to seek a private investor, not wanting to use taxpayer funds to support a bailout. However, fears of larger worldwide market implications forced the Fed to retract on that belief while denying any aid to Lehman Brothers, who collapsed this week.
Fears of systematic risk and greater market turmoil have been the catalyst for many actions taken by the federal government as of late. Just weeks ago, the Fed stepped in and took over Fannie Mae and Freddie Mac after it was clear the companies could not weather the mortgage crisis. Earlier this year, the Fed helped to facilitate the purchase of Bear Stearns by JPMorgan by providing the needed financing.
AIG has agreed to an interest rate that is 8.5 percentage points above the three-month London Interbank Offered Rate, putting it at about 11.4 percent.
After helping AIG avoid surpassing Lehman as the largest bankruptcy ever filed, the U.S. government has now spent over $700 billion in efforts to stabilize the markets and reverse the damage caused by the housing crisis.
Julie Scuderi Senior Editor for HedgeCo.Net Email: julie@hedgeco.net
HedgeCo.Net is a premier hedge fund database and community for qualified and accredited investors only. Membership on www.hedgeco.net is FREE and EASY. We also offer FREE LISTINGS for Hedge Funds! Be sure to check out our sister sites. For more information, visit www.hedgeconetworks.com
New York (HedgeCo.Net) – The recent controversial moves of Henry Paulson and the U.S. Treasury have Washington divided not only on the future of Fannie Mae and Freddie Mac, but on government’s new role in the U.S. mortgage market.
On Monday, Paulson and Federal Housing Finance Agency Director James Lockhart placed the two mortgage giants in a conservatorship, allowing the government to replace chief executives and eliminate their dividends, while giving them themselves the power to purchase up to $200 billion of stock in the companies. A new program has also been launched to purchase mortgage-backed securities from the two firms, starting with $5 billion worth this month. In accordance with the government assistance, Fannie and Freddie will have to eventually reduce their holdings of mortgages and mortgage backed securities.
This decision was months in the making, after downplaying problems and staving off rumors of a government bailout. Finally, Bush came out and called the situation an “unacceptable” risk for an economy that has been battered by the subprime fallout and the worst housing slump since the great depression.
"Allowing the companies to fail or further deteriorate would damage our home mortgage market, and could weaken other credit markets that are unrelated directly to housing," Bush said in his statement. "Americans should be confident that the actions taken today will strengthen our ability to weather the housing correction and are critical to returning the economy to stronger sustained growth."
The two companies guarantee about half of the nation’s $12 billion in outstanding mortgages. For months, amidst rumors of capital shortages, Fannie and Freddie denied any problems. It was only after Paulson hired Morgan Stanley to probe into the company’s finances did it come to light that the two firms were overstating their capital and did not have sufficient reserves. Concerns over their finances sent stock prices plummeting and mortgage rates soaring.
Overall, Fannie and Freddie suffered about $14 billion in losses, leaving the government with a tough decision to make.
Democratic Senator Charles Schumer agrees with the course chosen. “Paulson has threaded the needle just right by taking necessary action to stabilize U.S. financial markets while minimizing the liability for taxpayers,” he said. “This plan will be met with broad acceptance in Congress because it doesn’t prejudge the ultimate fate of Fannie Mae and Freddie Mac."
But while some current political figures may be on board, it is really going to fall on the next administration to determine the role of the government in matters such as this, and ultimately, the fate of the both Fannie and Freddie.
"The new Congress and the next administration must decide what role government in general, and these entities in particular, should play in the housing market,” Paulson said in Washington. “There is a consensus now that they cannot continue in their current form.”
However, the fear of alienating voters has forced both candidates to spew nothing more than political rhetoric while never fully disclosing their position on this issue. While Obama pushes for “some” invention and McCain expresses that there must be a surge of “confidence,” it is unclear what either of their stances are on the role of the government in matters such as this.
Lately there has been an increase in the government’s role in the financial markets. Six months ago, the Fed infamously funded the $30 billion in financing needed to rescue Bear Stearns and facilitate the purchase by JPMorgan. There are several permanent courses of action that may be taken with Fannie and Freddie, including a full blown nationalization that would cement the government’s role in the markets permanently. Whatever the course chosen, it will most likely fall on the watch of the next presidential candidate. It’s about time to put politcal jargon aside and pick a side.
Julie Scuderi Senior Editor for HedgeCo.Net Email: julie@hedgeco.net
HedgeCo.Net is a premier hedge fund database and community for qualified and accredited investors only. Membership on www.hedgeco.net is FREE and EASY. We also offer FREE LISTINGS for Hedge Funds! Be sure to check out our sister sites. For more information, visit www.hedgeconetworks.com
Globes – Priority Investments Ltd.’s Israeli hedge fund index, Hedge Fund Priority Index (HFPI) fell 0.85% in July, compared with a 4.66% drop by its benchmark, the Tel Aviv 25 Index. However, the Hedge Fund Research Inc. (HFRI) fund weighted composite index fell 2.17% compared with a 0.98% drop by the S&P 500 Index.
During the first half of July, high oil prices continued to trouble the US economy, and weighed down financial stocks, which weakened the dollar against other currencies. The US government bailout of Fannie Mae (NYSE: FNY) and Freddie Mac (NYSE: FRE), plus the restrictions placed on short sellers, contributed to gains in the second half of the month.
New York (HedgeCo.Net) – While the U.S. Treasury has done all it can to stave off rumors of a government bailout of Fannie Mae and Freddie Mac , some say the inevitable rescue is bound to take place after attempts to raise capital for the two mortgage giants have proved futile.
Preferred shares of the two companies are trading as low as 19 cents on the dollar, fueled by assumptions that their dividends will be suspended. This belief was the reason behind Moody’s recent ratings downgrade of their preferred stock to Baa3, the lowest possible investment-grade. Meanwhile, shares of both companies have experienced month after month of sharp declines, with Freddie down 93 percent and Fannie down 89 percent since November.
Together, the two companies account for over $5 trillion of outstanding U.S. mortgages. As the number of foreclosures reached record heights thanks to defaults on mortgages by subprime borrowers, Freddie Fannie have taken a beating since last summer, writing down almost $15 billion and forcing some to believe they will not be able to weather this housing crisis without the help of Uncle Sam.
Both Freddie and Fannie make money by offering mortgage-backed security bonds to investors. By selling these bonds, they assume the risk involved in the repayment of these loans. In exchange, they get to keep a guarantee fee that investors pay upon purchasing the bonds. It is easy to see, then, how the two companies that were believed to be “too big to fail,” started to experience problems. As more and more borrowers were unable to pay their mortgages, the responsibility fell on Freddie and Fannie. As they tried to stay afloat in their sea of debt, values of their securities started to plummet.
Recent attempts to try and find investors have been unsuccessful. Hedge funds like the Carlyle Group and Blackstone both expressed interest, only to rescind until further action by Treasury Secretary Henry Paulson.
"I think it starts with the constant doom and gloom, which makes investors quick to react when there is any sign of trouble ahead, and rightfully so," explains Michael Facchini, Portfolio Manager for Chicago-based Regent Global Funds. "Right now, investors are only interested in the cream of the crop when it comes to the MBS markets."
Federal Reserve Chairman Ben Bernanke has spoken several times about increased regulation of the companies, thanks to the widespread belief that Freddie and Fannie are government-backed. While both were created by Congress in an effort to increase homeownership and profits through the sale of their mortgage backed securities, they are in no way guaranteed by government funds.
In July, the Treasury and Federal Reserve outlined a plan to save Fannie and Freddie in order to prevent any chance of a Bear Stearns-like debacle. Among the suggestions, Paulson’s plan allowed for the Treasury to purchase shares of the two companies, should it prove to be necessary. That time has come, with some estimating the government may have to purchase about $60 billion worth of preferred shares.
Shares of Fannie Mae closed on Monday at $5.19, up 4 percent, while Freddie Mac rose 17 percent to close at $3.29.
Julie Scuderi Senior Editor for HedgeCo.Net Email: julie@hedgeco.net
HedgeCo.Net is a premier hedge fund database and community for qualified and accredited investors only. Membership on www.hedgeco.net is FREE and EASY. We also offer FREE LISTINGS for Hedge Funds! Be sure to check out our sister sites. For more information, visit www.hedgeconetworks.com
CNN Money – Third Point Management, a New York hedge fund run by one of the country’s most outspoken and controversial investors, has come under investigation from the Securities and Exchange Commission.
The $5.6 billion fund, whose founder Daniel Loeb is well known for his pointed regulatory filings targeting chief executives he deems underperforming, informed investors in a letter last month that it has been notified that the SEC has commenced a formal investigation into its communications with other hedge funds.
The SEC’s investigation into Third Point comes at a time when hedge funds are being criticized for playing a key role in the trading of various companies as well as in the continuing financial crisis. The SEC is investigating the actions of up to 50 hedge funds in the collapse of Bear Stearns and in the continuing troubles of Lehman Brothers and mortgage guarantors Fannie Mae and Freddie Mac.
According to reports, the SEC is investigating whether hedge funds knowingly and intentionally spread falsehoods about the financial strength of these – and other – brokers and banks. According to Institutional Investor magazine, which broke the Third Point story Tuesday, Loeb told investors that the communications were uncovered during the course of a routine audit last year after Third Point became a registered investment adviser.
Reuters – Billionaire investor George Soros hiked his stake in Wall Street firm Lehman Brothers to 9.5 million shares as of June 30 from 10,000 shares, according to a U.S. regulatory filing on Thursday.
Soros disclosed the quarter-over-quarter increase in a filing with the Securities and Exchange Commission.
Soros raised his stake in Lehman ahead of a turbulent month for the investment bank, whose shares plunged in mid-July amid a broader sell-off in financials sparked by concern about government-backed mortgage companies Fannie Mae and Freddie Mac.
Lehman shares rose 63 cents, or 4.1 percent, to close at $16.20 before the news. They are down 18 percent since the end of June and off 75 percent so far this year.
