Government takes control of Fannie, Freddie

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    Government takes control of Fannie, Freddie

    Teetering mortgage giants hold interest in almost half of U.S. mortgages
    The Associated Press
    updated 4:13 p.m. ET, Sun., Sept. 7, 2008
    WASHINGTON - The Bush administration’s seizure of troubled mortgage giants Fannie Mae and Freddie Mac is potentially a $200 billion bet that it will help reverse a prolonged housing and credit crisis.

    The historic move announced Sunday won support from both presidential campaigns, but private analysts worried that it may not be enough to stabilize the slumping housing market given the glut of vacant homes for sale, rising foreclosures, rising unemployment and weak consumer confidence.

    Officials announced that both giant institutions were being placed in a government conservatorship, a move that could end up costing taxpayers billions of dollars. Treasury Secretary Henry Paulson said allowing the companies to fail would have extracted a far higher price on consumers by driving up the cost of home loans and all other types of borrowing because the failures would “create great turmoil in our financial markets here at home and around the globe.”

    Mark Zandi, chief economist at Moody’s Economy.com predicted that 30-year mortgage rates, currently averaging 6.35 percent nationwide, could dip to close to 5.5 percent. That’s because investors will be more willing to buy the debt issued by Fannie and Freddie — and at lower rates — since the federal government is now explicitly standing behind that debt.

    “Effectively, the federal government has now become the nation’s mortgage lender,” he said. “This takes a major financial threat off the table.”

    Futures on all major stock indexes rose about 2 percent in electronic trading Sunday night, another sign of investor relief about the takeover plan

    The companies, which together own or guarantee about $5 trillion in home loans, about half the nation’s total, have lost $14 billion in the last year and are likely to pile up billions more in losses until the housing market begins to recover.

    The Treasury Department said it was prepared to put up as much as $100 billion over time in each of the companies if needed to keep them from going broke, in exchange for senior preferred stock. Treasury will immediately be issued $1 billion of such stock from each company, which will pay 10 percent interest. Further purchases of preferred stock will be triggered if quarterly audits find that the companies’ capital cushion is below prudent standards.

    The government, which will receive warrants representing ownership stakes of 79.9 percent in each company, is hoping that its moves will reassure nervous investors that they can continue to buy the debt of the two companies.

    “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,” President Bush said in a statement released Sunday afternoon. “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.”

    Democratic presidential nominee Barack Obama issued a statement agreeing that some form of intervention was necessary, and promised, “I will be reviewing the details of the Treasury plan and monitoring its impact to determine whether it achieves the key benchmarks I believe are necessary to address this crisis.”

    Republican presidential nominee John McCain also voiced support while his running mate, Alaska Gov. Sarah Palin, said that Fannie and Freddie “have gotten too big and too expensive to the taxpayers. The McCain-Palin administration will make them smaller and smarter and more effective for homeowners who need help.”

    The conservatorship will be run by the Federal Housing Finance Agency, the new agency created by Congress this summer to regulate Fannie and Freddie, a move taken at the same time that Congress greatly expanded the power of the Treasury Department to make loans to the two companies and purchase their stock.

    The executives and board of directors of both institutions are being replaced. Herb Allison, the former head of the TIAA-CREF retirement investment fund, was selected to head Fannie Mae, and David Moffett, a former vice chairman of US Bancorp, was picked to head Freddie Mac.

    Paulson was careful not to blame Daniel Mudd, the outgoing CEO of Fannie Mae, or Freddie Mac’s departing CEO Richard Syron for the companies’ current problems. While both men are being removed as the top executives, they have been asked to remain for an unspecified period to help with the transition.

    Fannie and Freddie both purchase home loans from banks and then repackage those loans as mortgage-backed securities which they either hold on their own books or sell to investors around the globe. This process provides banks with more money to make more home loans, greatly expanding home ownership.

    The impact of the government takeover on existing common and preferred shares, which have slumped in value in the last year, will depend on how investors react to Paulson’s assertion that they must absorb the cost of further losses first. Under the plan, dividends on both common and preferred stock would be eliminated, saving about $2 billion a year.

    After the Treasury Department’s announcement, credit rating agency Standard & Poor’s downgraded Fannie and Freddie’s preferred stock to junk-bond status, but reaffirmed the U.S. government’s triple-A rating.

    The Federal Reserve and other federal banking regulators said in a joint statement Sunday that “a limited number of smaller institutions” have significant holdings of common or preferred stock shares in Fannie and Freddie, and that regulators were “prepared to work with these institutions to develop capital-restoration plans.”

    The Fed released a letter from Fed Chairman Ben Bernanke to James Lockhart, the director of the Federal Housing Finance Agency, in which the Fed chief said he concurred in Lockhart’s decision to take control of Fannie and Freddie saying the action “will help ensure the safe and sound operation of the enterprises.”

    Analysts were split on how much the takeover could eventually cost taxpayers although they all agreed the up-front costs will be substantial, possibly hitting $100 billion as the Treasury is called upon to bolster the capital cushions at both institutions.

    However, if the plan does the trick of stabilizing the housing market and home prices stop falling and rebound, then the assets of both Fannie and Freddie should rise in value and the government should be able to sell off the companies and recoup its investments.

    But it could take a long time to work through that process given all the headwinds facing housing at the moment from the plunge in home prices to soaring defaults on mortgages which are dumping more homes on an already glutted market. The weak economy has pushed unemployment to a five-year high of 6.1 percent, further reducing demand for homes.

    “I think the government will end up having to put in far more money then they are planning right now (given all the problems facing housing) but the important thing is the agencies have been taken over by the government,” said Sung Won Sohn, an economics professor at California State University Channel Islands. “That means there will be less panic in financial markets.”

    Under government control, the companies will be allowed to expand their support for the mortgage market over the next year by boosting their holdings of mortgage securities they hold on their books from a combined $1.5 trillion to $1.7 trillion. Starting in 2010, though, they are required to drop their holdings by 10 percent annually until they reach a combined $500 billion.

    In addition, officials said the Treasury Department plans to purchase $5 billion in mortgage-backed securities issued by the two companies later this month, the first of a series of purchases planned by the government in an effort to bolster for these securities, which was badly shaken a year ago when the credit crisis first erupted with soaring defaults on subprime mortgages.

    Paulson said that it would be up to Congress and the next president to figure out the two companies’ ultimate structure and the conflicting goals they operated under — maximizing returns for shareholders while also being required to facilitate home buying for low- and moderate-income Americans.

    “There is a consensus today ... that they cannot continue in their current form,” he said.

    Members of Congress will be watching in the coming months to see how the takeover works, but more housing legislation appears unlikely until next year given the few weeks remaining both Congress quits to hit the campaign trail.

    Sen. Charles Schumer, D-N.Y. said the intervention was sparked by worries within the Bush administration that foreign governments would stop holding Fannie and Freddie’s debt. “This was the prudent course to take,” he said.

    Senate Banking Committee Chairman Chris Dodd, D-Conn., announced his committee would hold hearings on the takeover to address a number of unanswered questions so that the American people will know “if this unprecedented proposal will help keep mortgages affordable, stabilize the markets and protect taxpayer interests.”

    Lockhart said that all lobbying activities of both companies would stop immediately. Both companies over the years made extensive efforts to lobby members of Congress in an effort to keep the benefits they enjoyed as government-sponsored enterprises.

    Sunday’s actions followed a series of meetings Paulson had with Bush and other top administration economic officials with Bush relying heavily on the judgment of Paulson, who was the head of investment giant Goldman Sachs before he joined the Cabinet in 2006.

    “It is really an assent to Hank’s direction, guidance and judgment,” said a senior administration official, who spoke on condition of anonymity to discuss behind-the-scenes deliberations.

    © 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
    URL: Government takes control of Fannie, Freddie - Mortgage Mess - MSNBC.com

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    It's important to keep foreign countries invested in Fannie and Freddie at this point to keep the entire economy from melting down, but I still can't help but be disappointed at yet another massive bailout for thieves and gamblers using the money that I did hard work for.

    Just more of the same.
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    Stock market approves.

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    Again who do you think pays for that?




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    The government can kiss my Fanny, they're not touching my Freddie.
    Rules? You mean we have RULES for that???

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    Quote Originally Posted by dg806 View Post
    Again who do you think pays for that?
    Outrageous Severance Deals For Fannie/Freddie CEOs--Paid For By You


    Henry Blodget | Sep 7, 2008 9:20 PM

    Taxpayers are now on the hook for tens of billions of dollars of capital necessary to save Fannie Mae (FNM) and Freddie Mac (FRE). The CEOs of both companies--the ones who ran them into the ground--have thankfully been shown the door. But they're taking a nice pot of money with them.

    Specifically, Dan Mudd, the CEO of Fannie Mae, is getting $9.3 million of severance for destroying his company. Richard Syron, the CEO of Freddie Mac, is getting $14.1 million--in part because of a clause he added to his employment contract two months ago, when it was clear the company was headed for disaster.

    These severance payouts, of course, are chump-change relative to the usual CEO departure deals. And Mudd and Syron have taken it on the chin with shareholders, as their options and restricted stock are now largely worthless.

    But the severance money comes right out of the pockets of taxpayers, who didn't agree to the severance deals and aren't ponying up to save the companies because they want to. Taxpayers are saving Fannie and Freddie because they have to--because Mudd and Syron were incompetent.

    "Incompetent"? Is that too harsh? Absolutely not. Both men gambled big and lost bigger. The fact that they may not have appreciated how big a risk they were taking is no defense: If they didn't, they should have.

    Both Mudd and Syron chose to run their companies at an astronomical level of leverage, borrowing more than $50 for every $1 they put to work. Why? Because, in the good years, the companies made more money than they would have had they been levered, say, 20-to-1. Just because a housing crash of the current magnitude hasn't happened since the 1930s doesn't mean Mudd and Syron shouldn't have guarded against it. Instead, they chose not to, and the companies--and shareholders and taxpayers--have paid the price.

    Mudd and Syron should voluntarily renounce whatever severance they are "entitled" to and walk away empty-handed (like the shareholders whose interests they were hired to look out for). If they don't, Paulson and the Treasury should refuse to pay them.

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    Quote Originally Posted by min0 lee View Post
    Outrageous Severance Deals For Fannie/Freddie CEOs--Paid For By You


    Henry Blodget | Sep 7, 2008 9:20 PM

    Taxpayers are now on the hook for tens of billions of dollars of capital necessary to save Fannie Mae (FNM) and Freddie Mac (FRE). The CEOs of both companies--the ones who ran them into the ground--have thankfully been shown the door. But they're taking a nice pot of money with them.

    Specifically, Dan Mudd, the CEO of Fannie Mae, is getting $9.3 million of severance for destroying his company. Richard Syron, the CEO of Freddie Mac, is getting $14.1 million--in part because of a clause he added to his employment contract two months ago, when it was clear the company was headed for disaster.

    These severance payouts, of course, are chump-change relative to the usual CEO departure deals. And Mudd and Syron have taken it on the chin with shareholders, as their options and restricted stock are now largely worthless.

    But the severance money comes right out of the pockets of taxpayers, who didn't agree to the severance deals and aren't ponying up to save the companies because they want to. Taxpayers are saving Fannie and Freddie because they have to--because Mudd and Syron were incompetent.

    "Incompetent"? Is that too harsh? Absolutely not. Both men gambled big and lost bigger. The fact that they may not have appreciated how big a risk they were taking is no defense: If they didn't, they should have.

    Both Mudd and Syron chose to run their companies at an astronomical level of leverage, borrowing more than $50 for every $1 they put to work. Why? Because, in the good years, the companies made more money than they would have had they been levered, say, 20-to-1. Just because a housing crash of the current magnitude hasn't happened since the 1930s doesn't mean Mudd and Syron shouldn't have guarded against it. Instead, they chose not to, and the companies--and shareholders and taxpayers--have paid the price.

    Mudd and Syron should voluntarily renounce whatever severance they are "entitled" to and walk away empty-handed (like the shareholders whose interests they were hired to look out for). If they don't, Paulson and the Treasury should refuse to pay them.
    B I N G O
    It's not my fault or your fault that these companies made bad loan decisions and now people can't pay for those loans. Too bad IMO. I should not have to pay for it. Again, the poor working man gets the shaft. What if the working man gets in the minority? This country will go down the drain!




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    I can't believe the country isn't raising HELL!




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    I am glad they took over because investors were pessimistic while their futures were in the air, now that they see the government coming in to balance things we'll see more optimism in the markets and hopefully our economy will turn for the better....I usually don't worry about the economy but this mortgage crisis has had me sweating, I know if I was worried the people who live their life by these things must've been having panic attacks....
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    Another bailout:

    The Investment banks, the mortgage industries, Fannie and Freddie, and now even the US auto industry.

    Profits are privatized; losses are socialized.
    It's an accurate statement that our current spending will not be increasing the debt We've stopped spending money that we don't have.

    -- Jack Lew, then director of the Office of Management and Budget, in Feb. 16, 2011 testimony before the Senate Budget Committee.

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    Quote Originally Posted by Big Smoothy View Post

    Profits are privatized; losses are socialized.
    That's a good one.

    So true.

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    Quote Originally Posted by min0 lee View Post
    Stock market approves.
    The INVESTORS approve.

    Who profited by Fannie and Freddie to begin with? And who is being bailed out now? Not the working and middle-class homeowner - but the investors.

    Few Stand to Gain on This Bailout, and Many Lose

    By ERIC DASH
    Published: September 7, 2008

    Over the years, Fannie Mae and Freddie Mac showered riches on many winners: their executives, Wall Street bankers and Washington lobbyists. Now the foundering mortgage giants are leaving some losers in their wake, notably their shareholders, rank-and-file employees and, in the worst case, American taxpayers.
    Link: http://www.nytimes.com/2008/09/08/bu...=1&oref=slogin
    It's an accurate statement that our current spending will not be increasing the debt We've stopped spending money that we don't have.

    -- Jack Lew, then director of the Office of Management and Budget, in Feb. 16, 2011 testimony before the Senate Budget Committee.

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    Where did Brogers go?
    I think he was a CEO or is a still one, maybe he can explain this one.

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    Quote Originally Posted by danzik17 View Post
    It's important to keep foreign countries invested in Fannie and Freddie at this point to keep the entire economy from melting down, but I still can't help but be disappointed at yet another massive bailout for thieves and gamblers using the money that I did hard work for.

    Just more of the same.
    This entire Wall St/Bank bail out is another huge billboard to human stupidity, and it's ugly sibling, greed. A multi billion dollar (or is it trillions yet?) example of the fact that people seem incapable of taking any responsibility for their actions and bad decisions.

    I’m not an economist or even well read novice on matters of finance, and I could see this one coming a mile away. Like a train wreck, you can see it a long way off, and no amount of arm waving or shouting will prevent it.

    When the market was booming, I looked at interest only loans and other “products” that were being pushed hard to buyers, all of whom wanted their American Dream Mc-Mansion house.

    It was clear to me even at a casual glance these loans were a bad deal. I had friends who fell hook line and sinker for these loans and would say to me “Will, the equity in the home will rise quickly, then you either flip the property if it’s an investment or re finance to a fixed mortgage.”

    Great, in theory, but I would say “all bubbles pop, and you can’t be sure that equity increase will happen, and most properties are so over valued, when that bubble does pop, you will be losing equity not gaining it and will be upside down on your loan.”

    None of them listened to me and I know a bunch of people who are losing large sums of $$$, or worse, defaulting on loans, and generally screwing up their lives, not to mention credit scores. People act as if the banks did them wrong or some how fooled them, etc. Bull sh*& I say.

    News flash, since when has any bank or lending institution ever had your best interest in mind? Never is the answer. No matter what they are willing to loan you, it’s up to YOU to run the numbers and see if you can actually afford it, both short an long term. Because a person, or bank, is willing to hand you enough rope to hang yourself with, at the end of the day, you are responsible for you when you are swinging from that rope.

    Banks and loaning institutions fed off human greed and stupidity like drunks left alone in a bar with no one to stop them from drinking, and their greed fed off the buyers, which made for the mother of all feeding frenzies. The banks ignored well know practices for deciding who was a good risk, and gave loans to people they should not have, but at the end of the day, the buyer has to see if their debt to income fits the loan. News Flash, people and banks are all to happy to sell you or loan you things you can’t afford.

    When I want for an equity line, the bank said "are you sure that' s all you want?We can approve you for much more." I said no thank you, that's all I need at this time.

    People are shocked to find out the banks didn’t have their best interest in mind (now called “predatory lending”) because apparently people are too stupid to actually realize interest only has to end, interest rates do go up, bubble pop, and someone actually as to pay for that house…

    A few years ago, when the buying madness was in full swing, I sold a piece of property my mother left to me. I took that money and paid off my mortgage with it.

    My friends told me I was crazy. They told me I could turn that money into millions by using the money to put down payments on multiple properties (using interest only loans of course) and flipping the properties before the loans came due. That’s what they were all doing…They flat out told me I was crazy for paying off my mortgage.

    The only one who actually supported my doing that was my accountant. He told me it was a conservative thing to do, and yes, I could probably get a better return on other investments, but owning my own home outright was certainly not a bad financial decision.

    Meanwhile, I know all sorts of people who are upside down on their loans, have condos they purchased they can’t flip, and various other hardships that are the simple results human greed and stupidity, on both the buyer side and the banks side.

    Meanwhile, my “conservative” approach has me with no mortgage and a credit score a few points shy of 800. I’m not wealthy by any stretch, but I am reminded of the Tortoise and the hare story.

    Here’s my personal investing philosophy and how I approach such things: I take the best-case scenario and the worst case. In the worst case, if the deal goes bad, can I absorb the loss? If the answer is no, I won’t touch it. Yes, it’s basically that simple. Conservative? Damn right.

    Finally, I am reminded of an experience with a friend. He’s a professional gambler, and a good one. Unlike most, he’s always in the black in a given year, but has his good and bad months. He told me, a successful gambler has to be willing to lose large sums of money in a given night. He told me if I ever wanted to add in some of my own money (he goes to the casino with nothing less than 10k per night) he would do his best to bring back more than I gave him.

    He asked one simple question. “Can you afford to lose that much money if I don’t?”

    The answer was, no, no I can’t. And that’s why I don’t gamble with more money than I can afford to lose, and I don’t get into loans I am not willing to absorb if it all goes bad…

    Call me a boring conservative Tortoise if you wish, but most people have only themselves to blame for the current situation but will attempt to blame the evil banks and loaning institutions.

    Rant off.
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    Well said.

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    Quote Originally Posted by WillBrink View Post
    This entire Wall St/Bank bail out is another huge billboard to human stupidity, and it's ugly sibling, greed. A multi billion dollar (or is it trillions yet?) example of the fact that people seem incapable of taking any responsibility for their actions and bad decisions.

    I’m not an economist or even well read novice on matters of finance, and I could see this one coming a mile away. Like a train wreck, you can see it a long way off, and no amount of arm waving or shouting will prevent it.

    When the market was booming, I looked at interest only loans and other “products” that were being pushed hard to buyers, all of whom wanted their American Dream Mc-Mansion house.

    It was clear to me even at a casual glance these loans were a bad deal. I had friends who fell hook line and sinker for these loans and would say to me “Will, the equity in the home will rise quickly, then you either flip the property if it’s an investment or re finance to a fixed mortgage.”

    Great, in theory, but I would say “all bubbles pop, and you can’t be sure that equity increase will happen, and most properties are so over valued, when that bubble does pop, you will be losing equity not gaining it and will be upside down on your loan.”

    None of them listened to me and I know a bunch of people who are losing large sums of $$$, or worse, defaulting on loans, and generally screwing up their lives, not to mention credit scores. People act as if the banks did them wrong or some how fooled them, etc. Bull sh*& I say.

    News flash, since when has any bank or lending institution ever had your best interest in mind? Never is the answer. No matter what they are willing to loan you, it’s up to YOU to run the numbers and see if you can actually afford it, both short an long term. Because a person, or bank, is willing to hand you enough rope to hang yourself with, at the end of the day, you are responsible for you when you are swinging from that rope.

    Banks and loaning institutions fed off human greed and stupidity like drunks left alone in a bar with no one to stop them from drinking, and their greed fed off the buyers, which made for the mother of all feeding frenzies. The banks ignored well know practices for deciding who was a good risk, and gave loans to people they should not have, but at the end of the day, the buyer has to see if their debt to income fits the loan. News Flash, people and banks are all to happy to sell you or loan you things you can’t afford.

    When I want for an equity line, the bank said "are you sure that' s all you want?We can approve you for much more." I said no thank you, that's all I need at this time.

    People are shocked to find out the banks didn’t have their best interest in mind (now called “predatory lending”) because apparently people are too stupid to actually realize interest only has to end, interest rates do go up, bubble pop, and someone actually as to pay for that house…

    A few years ago, when the buying madness was in full swing, I sold a piece of property my mother left to me. I took that money and paid off my mortgage with it.

    My friends told me I was crazy. They told me I could turn that money into millions by using the money to put down payments on multiple properties (using interest only loans of course) and flipping the properties before the loans came due. That’s what they were all doing…They flat out told me I was crazy for paying off my mortgage.

    The only one who actually supported my doing that was my accountant. He told me it was a conservative thing to do, and yes, I could probably get a better return on other investments, but owning my own home outright was certainly not a bad financial decision.

    Meanwhile, I know all sorts of people who are upside down on their loans, have condos they purchased they can’t flip, and various other hardships that are the simple results human greed and stupidity, on both the buyer side and the banks side.

    Meanwhile, my “conservative” approach has me with no mortgage and a credit score a few points shy of 800. I’m not wealthy by any stretch, but I am reminded of the Tortoise and the hare story.

    Here’s my personal investing philosophy and how I approach such things: I take the best-case scenario and the worst case. In the worst case, if the deal goes bad, can I absorb the loss? If the answer is no, I won’t touch it. Yes, it’s basically that simple. Conservative? Damn right.

    Finally, I am reminded of an experience with a friend. He’s a professional gambler, and a good one. Unlike most, he’s always in the black in a given year, but has his good and bad months. He told me, a successful gambler has to be willing to lose large sums of money in a given night. He told me if I ever wanted to add in some of my own money (he goes to the casino with nothing less than 10k per night) he would do his best to bring back more than I gave him.

    He asked one simple question. “Can you afford to lose that much money if I don’t?”

    The answer was, no, no I can’t. And that’s why I don’t gamble with more money than I can afford to lose, and I don’t get into loans I am not willing to absorb if it all goes bad…

    Call me a boring conservative Tortoise if you wish, but most people have only themselves to blame for the current situation but will attempt to blame the evil banks and loaning institutions.

    Rant off.
    100% agreement. I had people "smarter" than me telling me to invest, buy a house, the whole 9 yards. They said i would be a fool not to get a house or get in to the market a little over 6 months ago. Who's a fool now?

    I am as financially conservative as they come. I don't think these companies or these people taking out shitty loans deserve any help whatsoever. You made your bed, lie in it. It doesn't take a genius to see that if I take home $4000 a month I can't afford a $5000 a month mortgage just because some asshole is willing to give me a loan for it.
    If sense were common, everyone would have it.

    4/2007-Current 75th Ranked most popular image 1 spot behind Prince's bulge...

    Check out my world famous Bob Loblaw's Law Blog at http://www.synergyhw.blogspot.com/...Just kidding, it's a health and wellness blog.

  18. #18

  19. #19
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    So, they're investigating, but if this fraud leads to convictions, what will be the punishment? A fine, and a couple of year at a golf resort, lockup?

    The securitization of the CDOs (bundled subprime mortgages that were given investor grade status by Fannie and Freddid and then sold) was a crime, and I assume many players were involved.

    I don't expect much but tough talk and a few fall guys to go down.
    It's an accurate statement that our current spending will not be increasing the debt We've stopped spending money that we don't have.

    -- Jack Lew, then director of the Office of Management and Budget, in Feb. 16, 2011 testimony before the Senate Budget Committee.

  20. #20
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    They are just doing this so they can recoup money from execs in the event this bailout occurs. Unless they prove wrongdoing, they have no leverage to take the $40 million dollars each of these guys made in court.
    If sense were common, everyone would have it.

    4/2007-Current 75th Ranked most popular image 1 spot behind Prince's bulge...

    Check out my world famous Bob Loblaw's Law Blog at http://www.synergyhw.blogspot.com/...Just kidding, it's a health and wellness blog.

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