Part 1 is here.    Waiting for the announcement - probably Sunday night.

thanks Tick Talk

ALSO HAS VIDEO:  Freddie ‘n Fannie “rescued” as Americans Perish - good thoughts - Don’t want to be an American Idiot?  Sorry, as of today, it’s too late. … - Tick Talk

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GSE Rescue: Spare the Moral Outrage - Alan Brochstein - AB Analytical Services

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MR Mortgage is not happy:  Fannie/Freddie MBS: Have You Ever Seen One? Bill Gross Must Not Have.

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David Kotok on GSEs and Moral Hazard - why bailing out the preferreds would increase moral hazard risk  - Cumberland Advisors   (available Monday)
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Fannie And Freddie Comments -  I’ve said so much about this Fannie and Freddie disaster I don’t really feel like adding much more until I see the actual plan (not just rumors about what is going to be in it).  However, I do have a few quick takes: - has 9 thoughts - Mike Steinhardt - HedgeFolios 

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copy of letter to Paulson:  Bill Ackman explains and repeats his plan for GSE bailout - Wall Street Manna

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Friday Afternoon Is Bad News Time -  If you’ve been paying attention, the Fed likes to release bad news after the markets close on friday afternoon. The past couple weeks, they’ve announced the failures of small regional banks.  Well today, they announced something just a little bit bigger - the government bailout/takeover of Fannie Mae and Freddie Mac, the two large mortgage finance guarantors. - A VC Musings of a VC in NYC  http://www.avc.com/a_vc/2008/09/friday-afternoo.html

Part 2 is here.

Fannie, Freddie Headed For Conservatorship - More Fannie, Freddie rescue details are slowing becoming available after hours …

Rescue Me

Rescue me
Oh take me in your arms
Rescue me
I want your tender charms
‘Coz I’m lonely and I’m blue
I need you and your love too
Come on and rescue me
Come on baby, take me baby, hold me baby, love me baby
Can’t you see that I need you baby
Can’t you see that I’m lonely
Rescue me

- MISH’s Global Economic Trend Analysis
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GSE Bailout Fuels Post-Bell Fires - … The structure of a Treasury backstop remains to be seen, but many market watchers, including well-regarded PIMCO chief Bill Gross, have called for a capital injection into the firms through an offering of convertible preferred stock, which would not bail out shareholders but also would not subordinate existing debt holders. … - Forbes

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Reports: Fannie Mae and and Freddie Mac to be seized - … According to the Times account, the “executives were told that, under the plan, they and their boards would be replaced, shareholders would be virtually wiped out, but the companies would be able to continue functioning with the government generally standing behind their debt, people briefed on the discussions said.” - … - USA Today 

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Fannie Mae, Freddie Mac to be Put Under Federal Control, Sources Say -  David S. Hilzenrath, Neil Irwin, and Zachary A.Goldfarb The government has formulated a plan to put troubled mortgage giants Fannie Mae and Freddie Mac … Deal Said to Involve Change of Leadership, Infusions of Capital … - Washington Post

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Paulson Plans to Bring Fannie, Freddie Under Government Control - Alison Vekshin and Dawn Kopecki - Bloomberg
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Rescuing Frannie - Felix Salmon - Portfolio.com 

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BILL GROSS SECTION:

1.  from PIMCO - READ THIS … ABOUT DELEVERAGING … - Investment Outlook - Bill Gross - There’s a Bull Market Somewhere? - PIMCO

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2.  PIMCO’s Bill Gross Politicking for his own Bailout - Click Broker 

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3.  Bill Gross Wants Treasury To Buy Assets To Prevent Tsunami - … Gross’ call is nothing but misguided socialism. If socialistic central planning worked, Russia would never have collapsed.  … - MISH’s Global Economic Trend Analysis

The trouble with some women is that they get all excited about nothing, and then they marry him. Obviously Ms. McCain is not saying that. They have finished up the conventions for the presidential election. We have representatives from Alaska (state motto: “11,623 Eskimos Can’t Be Wrong!”), Arizona (“But It’s A Dry Heat”), Illinois (“Please Don’t Pronounce the ‘S’”), and Delaware (“We Really Do Like The Chemicals In Our Water”). These folks are all employed, unlike many who were counted in this morning’s unemployment data.

Yesterday’s stock market sell off puts the DOW down 15% year-to-date, and today Merrill Lynch is not going to be helping things. Goldman Sachs cut Merrill to a “sell” and said it will likely incur additional write-downs on their mortgage investments. Stocks around the world were down overnight as yesterday’s drop in New York had a ripple effect. Fortunately this helped yields & rates, which dropped, and dropped again this morning. Prior to the 5:30AM PST unemployment data, the 10-yr was down to a yield of 3.60%. Then news hit of the Unemployment Rate increasing to 6.1%, much higher than the 5.8% that was expected, and sure to make headlines around the country. It is at a 4 ½ year high. Payroll employment (Nonfarm Payroll) shrank by 84k, more than expected, and the 8th straight month of declining! In addition, there were back-month revisions. Manufacturing lost 61k jobs, construction 8k, professional & business services lost 53k. The average hours of work remained unchanged from July at 33.7 but employers cut overtime to an average 3.7 hours per week. The 10-yr dropped to about 3.56%, and 30-yr mortgage prices… did very little.

Rates have been dropping significantly in recent weeks, and although the mortgage business is still grappling with tight underwriting and total lack of investor interest in non-government backed mortgages, rates are good! There is no more scheduled news for today, or for Monday. In fact, the only news prior to Thursday are Tuesday, with some trade numbers and pending home sales, so this morning’s numbers could set the tone for almost a week.

How is it that some lenders might see better pricing from Citi, Chase, and other parties that sell to Fannie, than they see from Fannie Mae directly? It is important to remember that the price of a loan is basically composed of two pieces: the value of the monthly income stream, and the value to the servicer for handling that monthly income stream. The former, known as the base price, is well established in the industry, and is based on expectations on how long the loan will be on the books, possible delinquency or foreclosure expectations, the revenue requirements of the company originating the loan, etc. The later, also known as the servicing released premium (SRP), is based on the same items, but to a smaller degree since the servicer collects 25 basis points, typically, for servicing the loan every month, and sometimes relies on the reliability and history of the company originating the loan. The length of time that they will be collecting these fees is very important, which is another reason that in a declining rate environment few companies want to pay much of a premium for a loan that they don’t believe will be around more than a few months. (Or they increase their premium recapture period.) The value of this servicing is very company and accounting-rule specific, and varies between firms. So the next time someone asks…

A drunk was proudly showing off his new apartment to a couple of his friends late one night. He led the way to his bedroom where there was a big brass gong and a mallet.

“What’s that big brass gong?” one of the guests asked.
“It’s not a gong. It’s a talking clock,” the drunk replied. 
“A talking clock? Seriously?” asked his astonished friend.

”Yup,” replied the drunk.
“How’s it work?” the friend asked, squinting at it.

“Watch,” the drunk replied. He picked up the mallet, gave the gong an ear-shattering pound, and stepped back.

The three stood looking at one another for a moment…….
Suddenly, someone on the other side of the wall screamed, “You ——! It’s 3:15 in the morning!”

Rob

MATTHEW LYNN - Five Places to Look for Next Investment Bubble -  Dot-coms? Done that. … Property? Oil? Corn? Been there, got the T-shirt and nursed the losses, as well.  -  Bloomberg

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Euroland and US: Inflation falling - DanskeBank Research 

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Radar Logic Index Falls 1.4% M/M, 17.2% Y/Y -  Radar Logic puts out a home price composite index (RPX).  It covers the 2 largest metro areas, and fell 1.4% month over month in June — far more than Case Shiller’s 0.5% decline last week.  … The two series use very different methodologies;  Case Shiller uses repeat-existing single-family home sales price; RPX index uses ‘price per square foot.’ RPX also includes new homes and condos as well as existing homes .. - The Big Picture 

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Chatty Alan -  Allan Sloan - Why, after years of measured silence, has Greenspan morphed into the great communicator? - Fortune CNN  

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Housing stabilization will lead the overall recovery - Irwin Kellner -  Marketwatch

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Homebuyers turn screws on sellers -  In this buyer’s market, many are taking advantage of sellers’ desperation, demanding major home repairs, warranties on appliances, and even tax rebates. -  Les Christie -  CNNMoney.com

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To Investors, Freddie’s Cushion Was Thin - David S. Hilzenrath - Washington Post

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Morgan Stanley’s Roach Says Economic Slump Has Only Just Begun - Fergal O’Brien and Carol Massar -   Bloomberg 
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Pick-a-payment loans turn poisonous -  Defaults on option ARM mortgages are expected to double in the next two years, driving foreclosure rates even higher. - Les Christie -  CNNMoney 

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REFERENCE LIST OF 25 IMPORTANT ARTICLES: Monolines, CDS Feature in CreditSights’ Top Reports of 2008 - Credit Sights - Research Recap

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IRA ARTMAN SECTION - thanks Ira:

National City offers cash to cut equity lines - Saskia Scholtes - … trying to reduce its exposure to the riskiest category of home loans by offering customers cash to close their untapped home equity lines. …  - FT.com 

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Recent Economic Growth Surge Is Unsustainable -  The Commerce Department’s preliminary estimate of growth in real gross domestic product (GDP) for the second quarter came to a heady 3.3% annual rate, up from the 1.9% “advance” estimate and the strongest pace since the third quarter of last year. The large upward revision primarily reflected much stronger net exports - David F. Seiders - NAHB Chief Economist

To Our Clients, Colleagues and Friends:

· We got quite a few calls the past week about net branches.  To repeat ourselves, we have a pretty good idea of which Net Branch Operators you’d want to become part of – and which you’d want to run away from.  So if you’re a broker or a banker who’s struggling a bit, give us a call to discuss what life is like when you switch from owning your own company to becoming a net branch.  In our experience and observation, most people end up wishing they’d made the switch a year earlier.  But you have to become part of the right organization!  We can help you make the right decision. 

· One of our bank clients is thinking about initiating an Alt-A program to hold in their portfolio. They’re smart guys, as the parameters will likely be 65% max LTV, no cash-out refinances, no third party and only for bank customers who maintain a checking account at the bank.  Isn’t this exactly what Alt-A was supposed to be? 

· We just were told that M ERS has done 30,000 e-notes, and that Fannie M ae has purchased every one of them.  There are major benefits for everyone involved, especially the correspondents. No note endorsements, no allonges and no lost note affidavits. Also the pick up in interest of a minimum 2-3 days is just huge.  A few years from now we’ll look back and wonder how we ever got along without paperless closings.

· Ten banks have failed so far in 2008.  The biggest was Indy M ac Bank, but what you didn’t know was that it was four times bigger than the next nine failed banks combined.

· The first cartoon is a commentary on the state of our currency. (The 2nd one kind of has to do with pizza).   M assive deficits have weakened confidence in the dollar, and a weak dollar makes things expensive abroad. Want a basic gin & tonic in London ?  If you pay with dollars, it will likely cost you $25-30.  Inversely, it allows foreigners to buy American assets cheaply.

· What’s one of the most important things in our personal as well as our professional lives?  Its success, and happiness is yours if you’re a success in work and a success at home.  Here then (is this a space filler or what?) is the word success in 14 Balkan and East European languages:

· Here’s a book we read years ago, but which is a real page turner:  It first came out as Every Secret Thing and has been re-released as Patty Hearst: Her Story.  First, this story captured the publics’ attention ten times more than the O.J. Trial.  Patty Hearst was a UC Berkeley undergraduate, and the heir to the Hearst billions.  A radical group of misfits who wanted to start a violent revolution, the Symbionese Liberation Army, kidnapped her from her college apartment, kept her in a dark closet and raped her for weeks.  She was brainwashed (you’ll never doubt it after reading the book) into joining them, and soon denounced her family as fascist pigs.  The 19-year old coed took on the revolutionary name of Tania and was photographed with a big machine gun, trying to look like a revolutionary.

She joined the SLA in high-profile bank robberies where people were killed, and the nation watched this whole thing with utter fascination for well over a year. During her time on the run (the FBI was still looking for her, no longer as a kidnap victim but as a bank robber) she made the cover of Newsweek Magazine seven times.  We can’t think of a more interesting book to read during these last few days of summer.  By the way, she served time for bank robbery, went back to being a very rich woman, and she now does cameos in virtually all of John Waters’ movies.

· Question: Who were Verex, C M AC, Tiger I M I, Ticor, A M I, and R M I.   Answer: They were all mortgage insurance companies that no longer exist.

· We’ve always loved the idea of a flat tax.  Aside from its utter simplicity and fairness, the nations who have it typically have strong, growing economies. East Europe was flat on its back after the fall of the Soviet Union , but by the mid-90’s, most of them instituted market reforms and flat taxes, and their economies soared. Here are the tax rates for some of these countries.  And by the way, many of them now compete for new business and new jobs by taking their tax bracket even lower. If you didn’t know, the flat tax is one, low rate for everyone, with zero deductions.  Tax returns are usually one page long.

Last year and early this year were all about cost-cutting and surviving the onslaught of re-purchases.  The 2^nd half of 2008 is about growth, margins, and profitability.  When we look at our clients who are doing well, we see a common theme.  Their owners or Presidents are all spending a huge amount of time on recruiting and growing the sales force.  We wrote about this before, and it’s truer than ever.  If you’re in a senior position or an owner, what percentage of your time do you spend on recruiting?  If it’s less than 25-30%, you need to do more!

Joe Garrett and Corky Watts  -  -  Garrett Watts and Co.

GMAC will cut 5,000 jobs (60% of its employees) at Residential Capital, and shut its 200 GMAC Mortgage retail offices.  (Reuters article here)    Announcements went out saying that, in spite of eliminating their retail and wholesale channels, “GMAC is committed to maintaining and growing the Correspondent Channel, supported by the Warehouse Division. The Conduit is actively buying loans at $3B a month and the Warehouse Division continues to add new business. GMAC Bank remains a strong, well capitalized bank under regulatory and market standards.” “Today, GMAC Residential Capital, LLC (ResCap) announced its decision to exit the Homecomings Financial, LLC wholesale and GMAC Mortgage retail branch mortgage lending businesses. I’d like to reassure all of our correspondent and warehouse clients that your business relationship with GMAC Bank will not be impacted by these changes. GMAC Bank will continue to fund loans from correspondent lenders and offer financing through its warehouse lending business. These business lines have made and will continue to make significant contributions toward achieving performance expectations for our enterprise. In addition to remaining committed to our business-to-business relationships through GMAC Bank, ResCap will continue its direct-to-consumer channel and mortgage servicing businesses.”

Wachovia (the nation’s 4th largest bank) received some negative press in the San Francisco Chronicle regarding borrowers who try to modify mortgages in ways that would help local borrowers hold on to their properties. The full story can be found at SFGate.com.

Thornburg Mortgage, now showing up on the heinous Implode-O-Meter site, has extended the deadline of its preferred stock tender offer as it continues working on their bailout agreement. Fortunately Thornburg has met and exceeded the requirement that preferred stockholders tender at least two-thirds of the total preferred stock in all categories, but it has extended the deadline for the tender to September 9, to give it time to “negotiate clarifications” regarding future margin calls with the bailout investors.

Here is some clarification on some US Bank news. The information about US Bank eliminating correspondent business is from the Consumer Finance group (nonconforming Niche programs).  There is a separate business channel for the A-Paper Correspondent Lending group that has not been affected by this downsizing. No one should confuse the correspondent operation with the US Bank wholesale broker channel, which is in full operation.

When you’re selling a car, to attract buyers, the owner will clean & wax it, vacuum the interior, and have the oil changed. When you’re a bank, trying to attract deposits (which, remember, are liabilities on the bank’s balance sheet, but are the fuel for growth and lending), the branch will often offer great, above-market CD rates. I went into WaMu last week, and they were offering 5% for 1 year! I knew this because they had written it on a dry-erase board next to the line, and the teller told me about. The entire Treasury yield curve, including 30-yr bonds, is below 5% now, and a 1-year Treasury security is nearing 3%. Interesting times. When I went in yesterday, they had dropped their rate to 4.50%.

Yesterday rates improved, and so far this morning we’re looking at the same! The yield on the 10-yr is down to 3.67%. Yesterday during the morning we had Factory Orders +1.3% in July, stronger than expected. In fact, Factory Orders have been strong for several months now. However, the bond market seemed to shrug it off, and we improved as buyers for mortgages came in and the Fed’s Beige Book was released. (Goldman called it “An unremarkable report, reiterating weak growth trends in most sectors, an ongoing tightening in credit availability, continued input price increases (though with a nod to the recent downturn in commodity prices), and softening labor markets.”) This morning we’ve already had the ADP Employment Change Index, Jobless Claims and the next-up is ISM’s Non-Manufacturing Index. The number of U.S. workers filing new claims for jobless benefits jumped by 15,000 last week, indicating that the labor market is still weak. Initial claims for state unemployment insurance benefits climbed to a seasonally adjusted 444,000 in the week ended Aug. 30 from a revised 429,000 in the prior week, according to the Labor Department. Tomorrow, of course, we have Nonfarm Payrolls (expected -75k) and the Unemployment data (expected to go from 5.7% to 5.8%). Remember that interest rates have dropped quite a bit lately, and the market is technically “over-bought” – so think twice before believing that rates can fall much more after tomorrow’s numbers especially since there is no news due out Monday.

An older man approached an attractive younger woman at a shopping mall.
“Excuse me. I can’t seem to find my wife. Can you talk to me for a couple of minutes?”
The woman, feeling a bit of compassion for the old fellow, said, “Of course, sir. Do you know where your wife might be?”
“I have no idea, but every time I talk to a woman with like you, she seems to appear out of nowhere.”

Rob C.