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Fannie, Freddie, Cheshire and Derbyshire

Robert Peston | 14:54 UK time, Sunday, 7 September 2008

After a brief period of calm in the summer, new disturbing evidence has been disclosed today of the weakened condition of financial institutions, both big ones and smaller ones.

The US Government is in effect nationalising North America's two biggest providers of finance for the housing market, Fannie Mae and Freddie Mac.

Their regulator, the Federal Housing Finance Agency, is taking direct control of them under a system known as "conservatorship".

This is an event of profound significance for the global economy, since these two eccentric institutions own or guarantee almost £3000bn of US mortgages.

Banks, including some of the world's most important central banks, have direct and substantial financial exposure to both Fannie and Freddie.

So, given the febrile state of markets across the world, it has become dangerous for doubts to persist about whether these two are viable and would be able to keep up the payments on their massive liabilities.

What's brought Fannie and Freddie to this humiliating impasse?

Well there's the continued decline in the US housing market, the sorriest housing market on the globe (for all the falls in UK house prices).

And then there's the discovery by Morgan Stanley, the investment bank advising the US government, that Freddie's capital resources are smaller than meets the eye.

For the US Treasury, the bailout could turn out to be one of the most expensive financial rescues in history, running to tens of billions of dollars.

Bad news, except perhaps for our own Chancellor of the Exchequer, Alistair Darling - since the Fannie and Freddie rescue costs may well make the potential losses for the taxpayer from Northern Rock seem almost modest (well almost).

Also the US banking debacle gives a bit more credibility to Darling's claims that the UK's economic and financial woes are at least in part the consequence of a global storm, for which he shouldn't be blamed too much.

In fact, while I write, two of our own housing-finance institutions are being steered by the Financial Services Authority into safe harbour, as the Nationwide negotiates to take ownership of two rival building societies, the Cheshire and the Derbyshire.

These are tiny compared with Fannie and Freddie, but they are not trivial in a UK context.

Derbyshire is the UK's ninth largest building society with £7bn of assets and the Cheshire is number 11 with £5bn. Together they have not far off a million customers.

But each has a structural flaw which makes it harder for them to carry on as an independent.

Derbyshire is perhaps a bit too dependent on funding from wholesale financial markets, which since the onset of the credit crunch last summer has been much harder to obtain.

And Cheshire has a commercial property business that is not in the greatest shape.

So although neither of them are bust and there is no reason for their depositors to be unduly alarmed (their savings are safe), the City watchdog, the FSA, wants them under the stewardship of the more robust Nationwide.

The harsh reality of the decline in the housing market means that the members of the Derbyshire and the Cheshire should not expect a windfall or any kind of payment from this deal.

Nor will they get a vote on whether the mergers will go through, as normally happens in consensual deals.

I have learned that the FSA will use its power to force through the transfer of ownership fairly speedily - because any period of uncertainty about the ownership of a bank or building society right now is fraught with risks.

UPDATE 17:31

The scale of the support being provided by the US Government to Fannie Mae and Freddie Mac is quite breathtaking - up to £110bn and the right to own 80 per cent of each of them.

This may not be conventional nationalisation, but its effect is the same.

The two mortgage providers will be under the direct control of their regulator, they will be run by two new chief executives selected by that regulator (both of whom have reasonable track records), and it will be US taxpayers who will have the formal ability to take majority control of them.

What's been announced makes the nationalisation of Northern Rock in the UK look like small beer.

Why the dramatic evasive action?

Well these two provide a good half of all mortgage finance in the US - so when they're in critical condition, there's no possibility of recovery in the ailing US housing market.

And if the US housing market doesn't recover, that prevents the US economy from recovering - and as the boss of HBOS told me (see yesterday's blog), it also prevents the UK economy from getting back on track.

What's more their health is vital to confidence in the global financial system, since more or less every commercial and central bank on the planet has some kind of exposure to them.

So not only are they too big to fail, but they've also got to be returned to some kind of viability for all of us to start to feeling a bit more prosperous again.

Comments

Page 1 of 2

  • Comment number 1.

    Although I am no fans of politicans I do support the idea that the current economic situation is so big that it really is out of Darlings control.

    However, I am sure that he will continue to get all the blame no matter what the cause or effects of the current crisis.

    The only real issue is about our own housing market and how it was allowed to get so bloated and out of control in the first place. I suspect a weak wristed regulator is to blame.

  • Comment number 2.

    Soon we will read nice comments here. Once again we will be told to cheer up and that anyone who doubts that the Anglo-American life-on-debt approach to economy isn't viable will be called a doom and gloom monger. I reckon it will be another year of harsh reality before the first voices from politicians will be heard that speak out openly that a change in economic thinking and policy must and will take place.

  • Comment number 3.

    We know what caused this...spiv-like American 'banking consultants' inventing a great con so that they could lend money to people totally unsuitable. Insurance to cover defaulting! Less stringent checks on financial backgrounds by amateur 'financial consultancies'...greed on the part of the sellers and the banks,all raking in huge bomuses, commissions and overnight profits. And then one day the bubble burst,and of course greed by people treating property as a kind of private gold mine.....

    And of course banks worldwide had all wanted a piece of that pie too,so they all got burnt too,then governments using taxpayers money to bail them out.

    How about naming some names of the bright sparks who thought this all up? How about looking for collusion from the governments and regulatory bodies? The amazing thing is that all this seems to be accepted as if it is just the normal part of business life and nothing out of the ordinary in the business cycle. Of course this cannot be true,unless insanity is the rule of the day in modern banking.

  • Comment number 4.

    The credit crunch and collapse in the market is no surprise as there has rarely been a clearer example of a real world house of cards. When people start to buy on a widespread basis residential housing as an investment rather than homes their value a stable commodity is eroded, sadly the bankers lending the money were not savvy enough to recognise this.

    The scary thing is what extent was the mislending of the the American and British banks colluded to by the Financial authorities? It's all rather alarming that despite all the Financial regulation of this world this kind mess can still occur. The greater concern surely is that a year down the track of the credit crunch debris is still floating to the surface. As this is the case one has to collude the financial disarray will continue for a year or two before we can confidently look towards some kind of stability.

  • Comment number 5.

    Good to see private enterprise failing again, and being bailed out by Government.

    Have the Americans suffered declining pensions, failing endowments too?

  • Comment number 6.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 7.

    I don't see how Fannie and Freddie can have a problem. As I understand it, these companies "underwrite" loans extended by US banks, to borrowers, based on some security (asset). As the banks have lied about the "value" of the asset, along with the "suitability" of the borrower, then Fannie and Freddie can simply decline to pay out. Of course this only works if Fannie and Freddie had no knowledge, or collusion in, the deceipt of the banks. ;)

  • Comment number 8.

    US Government Debt doubles to 6 trillion US$ - Wow. All bets about an 18 month recovery talked of by HBOS are now off. 180 months perhaps!

    This is no surprise, but like Northern Rock it has taken a year coming. Conservatorship is (I think) a bit like Administration in the UK, if the charge was owned by the public purse.

    Lawyers will make lots and lost of money and the US Government has to admit to doubling its national debt - WITHOUT actually providing any additional financial liquidity for the markets. For the markets to recover additional liquidity has to arrive from somewhere.

    This week's revelations will continue as the current owners of the paper issued by the former Freddie and Fannie own up to their indebtedness and write the paper off(?).

    This is a huge increase in uncertainty and it is almost impossible to see circumstances that could not be more damaging to the World's financial markets and trade.

    We are in for a rash of domino defaults and rescues, which could take months or even years to materialise.

    It will get very very difficult to borrow any money of US property fro a while and this will be reflected in further price drops, both there and indeed here.

  • Comment number 9.

    They all have one big thing in common: Greed...

  • Comment number 10.

    How will the markets react to this news? FTSE/Dow crash or bounce?

    I would guess there'll be led by banks and all the other finanials.

    Happy days.

  • Comment number 11.

    I am no champion of gold.
    Dug out of the ground in one part of the world and buried in another. Net result; waste of manpower and energy.
    But when the UK government sold off surplus gold a few years ago how much of the proceeds were invested in Fannie and Freddie's bonds?
    Net result; waste of just about everything.

  • Comment number 12.

    Del Boy banking practices in the US and UK have caused all this.
    But what were the US housing Finance Agency doing when all the dodgy mortgages were being sold?
    Out to lunch I suppose.
    And the Del Boys are all still "earning" millions.
    And what were the FSA and government doing at that time...nothing.
    We await with dread the stockmarkets over the next months.

  • Comment number 13.

    More doom and gloom from Peston.
    BBC just reported that this will stabilise the markets with the FTSE rising tomorrow.
    I dont believe a word of any of these experts especially Peston, people just wake up tommorow and see where it all goes at least we will all be still alive better than facing a War.

  • Comment number 14.

    Any more nationalisation of toxic-waste by Crash Gordon and we can look forward to the £5 loaf.

  • Comment number 15.

    > We know what caused this...spiv-like
    > American 'banking consultants' inventing
    > a great con so that they could lend money
    > to people totally unsuitable.

    That's right, frglee, but I blame Britain, not Amercia.

    I specifically blame Mrs. Thatcher, who taught a generation of young city slickers that greed and selfishness are good. This is the homecoming of the journey that started here in Britain back in '79.

    Basically, she and her followers (Gordon Brown?) have converted a national winter of discontent 30 years ago into a global one now. Well done, Mrs. T! I'm so glad you are around to witness it.

  • Comment number 16.

    If you Brits are counting on a recovery of the US
    economy, you may have to wait a while for your
    number to come up.

    Consider this web site.

  • Comment number 17.

    All yea who read Peston just remember the blog is the personal unchallenged opinion of him and him alone, dont be surprised that he has got it completly wrong.
    Nice one Peston defending Mr Darlings comments of last weekend.

    Football as they say is about opinions just like so called financial opinion.

    When predicting the markets they do three things.

    Go up
    Go down
    Stay as they are.

    So you have a 2 to 1 chance of not losing your money if it goes up you win, if it stays the same you get your money back.

  • Comment number 18.

    The supremacy of the central banking-warfare investment model that has ruled our planet for the last 500 years depends on being able to combine the high margin profits of organized crime with the low cost of capital and liquidity that comes with governmental authority and popular faith in
    the rule of law.

    Our economy depends on insiders having their cake and eating it too and subsidizing a free lunch by stealing from someone else.

    This works well when the general population shares in some of the subsidy, grows complacent and does not see the “real deal” on how the system works.

    However, liquidity and governmental authority will erode if the general population becomes aware of how things really work.

    As this happens, they lose faith in the myth that the current system is fundamentally legitimate.

    This jeopardizes the financial markets that depend on fraudulent collateral and practices to continue to work.

    This consensus is made all the more powerful by the gush of growing debt used to bubble the housing and mortgage markets and manipulate the stock,
    gold and precious metals markets in the largest pump and dump in history — the pump and dump of the entire American economy.

    This is more than a process designed to wipe out the middle class. This is genocide — a much more subtle and lethal version than ever before perpetrated by the scoundrels of our history texts.

  • Comment number 19.

    It looks like its back to 1970s Britain for the Republican party. How much does every taxpayer have to pay in a one off tax? Are they all shareholders? The funniest story this year. Is this a handout to bail out these banks? Is it Gordon Browns mismanagement of the American Economy? This is too easy.

  • Comment number 20.

    Can I ask why this decison is being slated like the Northern Rock one was? If NR was a bad decison, this is worse so why no harsh words about the US? Is it because it was actually a good decision on Darlings part and you're not man enough to admit it, or is it simple BBC anti-Gov bias driven by the fact that the government took you on over dodgey reporting and won?

  • Comment number 21.

    So the US treasury capitulates to inflation.

    We live in interesting times and they are about to get a lot more interesting.

    And how will the markets go. Who cares. All that matters is "how are you going to avoid losing the majority of your savings".

  • Comment number 22.

    #5, #7:

    You forgot the the old joke: if you owe your bank a hundred thousand dollars, you have a big problem. If you owe your bank a hundred million dollars, your bank has a big problem.

    Actually, there is no real problem for the US housing market. The Russians and the Chinese could buy up the debt and hardly notice it.

    Now the Olympics are out of the way, the Chinese might just do that. Housing a few million Chinese immigrants in repossed US property could be a better economic deal for China than pouring funds into South America and Africa. If the US doesn't like that idea, all China has to do is stop buying T-bonds and watch the US dollar head south for the winter...

  • Comment number 23.

    Can somebody help me out here, please?

    I'm reading that these 2 mega institutions "either own or guarantee" about half of all US mortgages, including (I'm supposing) a large portion of the problem loans.

    So, if they are feeling the pain on all of this (you know, the defaults, the write downs and stuff), how come all these banks are also taking a massive hit on the same thing?

    I mean, if a $100,000 loan defaults, then that results in a loss of $100,000 for either the lender or the guarantor or the owner of the debt obligation ... depending whether it's been securitised and/or underwritten.

    That's right, isn't it? ... losses can't be more than $100,000, can they?

  • Comment number 24.

    Wow! The US national debt goes at a stroke from $6trillion to £9trillion. The only way for the US to get out of this mess is to print more money - this effectively makes the debt worth less. The problem is that money can only stoke inflation further.

    The dollar is in danger of instability and losing its status of the World's reserve currency. Which currency to take over? They will all start to effectively devalue their own values to keep up the pace with US$. Paper money is gradually getting worthless. The only things left of value will be "physical stuff" so go out and buy your gold now.

    However, the City's spectacular short term views about everything will no doubt be that Uncle Sam has stepped in to save the day (again). Expect the stock market to rise strongly over the next month, as it did after the large capital injections by the Fed earlier this year. However the only way after that is down, down, deeper and down.

  • Comment number 25.

    #13 welshrams

    The announcement was made to be well before the Far East markets open for Monday - we will know what is going on long before the London markets open, but by mid-afternoon our time the hope is that the US market will not see a too large movement, one way or another.

    The problems are not Freddie and Fannie, but that nobody knows who is holding Freddie and Fannie paper in the rest of the World market.

    One certainty is that today's act has reduced quite dramatically global liquidity and will make it harder to borrow for everybody Worldwide- including UK home buyers and businesses.

  • Comment number 26.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 27.

    Jacquescartier where do you get the idea that Gordon Brown is a Follower of Thatcher?

    You do realize you are talking nonsense?

    need to do less whinging and blaming and accept that the next president must take a lead on both the economy and the environment. The credit crunch is just the debris of the collision between these two being badly driven by capitalism.

  • Comment number 28.

    I'm loving comment 15 blaming Mrs Thatcher for the current economic woes. It seems she and George W Bush get the blame for anything these days.

    If you can find any evidence that she stated that greed and selfishness are good or that she indoctrinated this into city bankers then please put the link up here. I think cause and effect are being blurred. Many proponents of monetarism in the 70s were convinced that people acted out of their own self interest but monetarism was borne out of this observation not the other way round.

    Even if it were the case that Thatcher had the brokers in for a pre-market indoctrination on 'avarice and egoism for dummies' on a Monday morning, it's a large conceptual jump from Britain 1979 to the sub-prime market in America 2007.



  • Comment number 29.

    Thinking aloud, is this how the crash in 28 started. Eventually the Canadian and American Governments wiped out all debt.

    Must of been hard on the investors of the day to have all thier investments wiped as well.

  • Comment number 30.

    The solution is simple... and inevitable... Print money.

    Control inflation using the bank reserve ratios, they don't deserve any more.

  • Comment number 31.

    Fannie and Freddie shares trade on the German stock market so take a lok at where they trade before Wall Street opens.

  • Comment number 32.

    #16: Greetings, gunsandreligion! As usual, you are prescient, and right on point!

    To our friends in the UK: Never have said anything like this before, but I think you are owed a public apology from the US Congress, which set up the whole Freddie/Fannie debacle sometime in the 70's.

    (Actually, we the US voter, who elected these clowns over the years, are the ones who owe the apology.)

    The policy of 'easy money for mortgages' artificially ballooned housing prices here, but made everyone feel soooo good in the process. Sort of like giving unlimited vodka shots to a drunk--he's so grateful, and we feel so charitable!

    In the 1990's, the Wall Street Journal was ringing the alarm bells about the accounting practices at Freddie/Fannie. It all fell on deaf ears.

    As early as the 1970's--remember 'The Money Game', written under the psuedonym 'Adam Smith'? He warned that, under the system in operation, that the US taxpayer could end up as the final guarantor for the world's financial system. Again, deaf ears all around.

    We've had warning, all of us. Thirty-year, FORTY-year mortgages(!!) lent on inflated values and cooked income statements. Credit card companies throwing offers at families nonstop(I still get them!). It all had to end someday, and the sooner we all 'man up' and get through this, the better for all, everywhere.

    Pray that whoever takes the helm in early 2009 is blessed with great wisdom and courage, and doesn't attempt to tax and 'stimulate' the US economy out of its current woes. Otherwise we are headed for calamity, not just discomfort.

    Hopefully, wiser heads in the UK can lead the return to fiscal reality.

  • Comment number 33.

    #1 (lionHeretic).

    The UK housing market balloon that has now burst was pumped up due to the over-generous housing benefit scam that virtually created a new home every time a couple split and every time a new immigrant arrived. The government then intervened by encouraging massive house building.

    Interestingly Freddie and Fanny were originally born out of a distorted market and ended up with an overbearing chunk of the market.

    Contrary to the idea that these crises were down to poor regulation, they both had roots in government meddling.

  • Comment number 34.

    Wow! Milton Friedman must be turning in his grave, or standing on his head. His economic policy views helped bring about monetarism, privatisation and deregulation around the world, and influenced Ronald Reagan in the U.S., Brian Mulroney in Canada, Margaret Thatcher in Britain, and Augusto Pinochet in Chile, and (after 1989) in Eastern Europe. He advocated minimal government and a free market to create political and social freedom. The neo-Con government of President George W. Bush also supports this policy, yet here it is nationalising two giant financial institutions.

    Not long before he died, Milton Friedman asked who in the world would want state-owned companies to run businesses. He said private corporations were the only way to get success and progress. So Friedman joins other economic theorists (like Karl Marx) in having his theories bite the dust.

  • Comment number 35.

    > trueturk:
    > Jacquescartier where do you get the
    > idea that Gordon Brown is a Follower
    > of Thatcher?

    There is no doubt about it. I have
    photographic proof that Gordon Brown
    _followed_ Mrs. Thatcher through the door
    of Number 10, on the (unlucky for him)
    13th September last year!




  • Comment number 36.

    Jonno_79 wrote:

    > it's a large conceptual jump from Britain 1979
    > to the sub-prime market in America 2007.

    Yeah, history is bunk, eh?

  • Comment number 37.

    Well, for reasons I don't quite understand, but after the Fannie May bail out news, the euro is going to continue its plunge for at least another 9 big figures, and gold against USD is going to plunge as well, virtually as soon as markets open today Sunday.

  • Comment number 38.

    The complicated language cannot hide the stark reality that the world's banks are grinding to a halt.
    Simplified it is going to get worse. How bad is bad?
    Unemployment rising and people unable to pay back loans and mortgages. A downward spiral no matter how you try to spin it. Businesses failing one after another.
    All they are doing is trying to put off the day of reckoning.
    The real unknown is where will it eventually end?
    I have not heard one economist who can come up with the right answer.
    The real question will be when do you know it has reached rockbottom and what do you do when you get there.


  • Comment number 39.

    I would be interested to know which British institutions (banks and pension funds) are holding Fannie/Freddy preference shares.

    Apparently bond holders will be protected, but the shareholders are likely to lose everything. This might have a big knock-on effect for us in the UK.

    We are told that the markets will go up on Monday morning, but I find this hard to believe. I would also expect the dollar's surge against the euro to go into reverse. It will not necessarily go down against the pound though, since sterling is almost as sick.

  • Comment number 40.

    Perhaps the esteemed contributors to this
    blog can resolve a conceptual problem for
    me.

    How can we have inflation and a credit crunch
    at the same time? If there is no practical money
    supply, does it matter how much money one
    prints?

  • Comment number 41.

    Mortgages, like pensions, are very significant and complex commitments, but they are controlled by highly trained people with a profiteering motive. Mortgages and pensions should not be so lightly regulated. Indeed, they should not be the sole domain of the free market or private finance. Naturally we can just continue as we did before and watch the same sad scenario unfold again in the future.

  • Comment number 42.

    It was New Labour that finally put the neck our economy in the noose and those of us that have been predicting exactly what is happening now are somewhat vindicated to a degree.

    Britain enjoyed for many generations a hybrid mix of socialism and capitalism that worked well, saw us through the aftermath of WWII and the US forcing the UK into a currency crisis over Suez.

    But as time went on, as British politicians lost their backbone, their patriotism to this country and sold their souls for a cheap dime to the American "way" we have watched in quite quick time New Labour under the American's direction sell out the infrastructure of this country and through that eviscerated this nations ability to cope with shocks and financial crises.

    For the most part we have been used by our so-called "allies", taking their toxic debt on a nod and a wink and now it seems again that more toxicity is about to emerge with the corruption and lies being exposed once more.

    Bush on the other hand does little to keep these things from spiralling further, he orders the mint to increase its daily printing of dollars, resolutely watering the dollar down and moving the US into hyperflation, his actions do little to calm financial markets with constant threats of US action against Iran, NATO beating its chest at Russia and the continuance of allowing the Israeli's to do their thing causes further jitters especially in the oil markets and making OPeC members consider once again of moving oil trades to Euro's which are worth a considerable amount more than the watered down dollar.

    It is a culmination of all these things, not just one that has brought us here, Darling is only holding the reins that Brown held before him, in the crisis created by Bush, Blair and Brown, New Labour have done little for this nation but it seems have expended a heck of a lot of our resources in keeping the US afloat and I find that outrageous.

    As the US empire collapses, is it not wise that we readjust our loyalties rather than be dragged down into the financial abyss America is going into? Are we not making matters worse by shoring up what is essentially an economy many trillions of dollars in the red?

    These are issues that our politicians should be addressing, not rehearsing scripts from Washington

  • Comment number 43.

    @40

    I would explain the simultaneous occurrence of high inflation and the credit crunch thus:

    I heard an American interviewee on Bloomberg say that inflation is 'too much money chasing too few goods'.

    With that in mind an explanation for the inflation in the UK could be phrased thus:

    1. concerns about the supply of commodities (perceived fewer goods) and;

    2. the rise in demand of commodities from the developing markets (more money chasing those goods).

    The inflation is, therefore, for the most part driven by outside influences

    The credit crunch mainly concerns the unwillingness of the banks to lend to each other due to the concerns that their balance sheets may contain sub-prime securitised debt. Although this reduces the growth in the money supply as you point out, the inflation we are feeling is mostly the 'cost push' inflation described above. It is therefore quite possible for tight lending conditions to coincide with high inflation.

    In answer to your last question, printing more money would produce inflation as there will be more money cahsing the same amount of goods.

  • Comment number 44.


    So far UK depositors are fortunate to be reimbursed by the Bank of England. Here in the US there were about 2 Billion dollars of deposits in IndyMac over the US FDIC insurance limit of $100,000.

    There are reports that the FDIC is initially guaranteeing 50 percent of the uninsured deposits.

    I hope the customers of leveraged US banks that follow IndyMac into new management will be more strongly supported by the US.

    In the case of Freddie Mac and Fannie May the US will probably attempt to fulfill the bond guarantees, mortgage derivatives, and bonds issued by them. Otherwise more institutions will fail.

    The treatment of the preferred stock issued by Freddie Mac (14 Billion $) and Fannie Mae (21.7 Billion $) will be most watched. These are widely held by US financial institutions which do not need further losses.


  • Comment number 45.

    I am generally shocked at attitudes in the financial services sector. I was a regulated entity but returned my registration when I was not deemed to be strong enough financially. If I ran my business as some of our financial business are run, I would be bankrupt. As it is I have a thriving business operating in an unregulated environment. The problems of the credit crunch in the financial sector are caused by greed in chasing bonuses and profits. Right now the financial services sector seems to be driven by economic reality. Long may it continue!

  • Comment number 46.

    Robert, where are you getting your information regarding losses for the Fed? I watched the announcement and Paulson stated that the American taxpayer was unlikely to lose any money and more likely to profit from this.

    Given that they have experience of this type of rescue with Continental Illinois I suspect there is every chance that the Treasury will make money out of this.

    Nice of you to reasssure the depositors of Derbyshire, pity you hadn't done so with Northern Rock!

  • Comment number 47.

    #43, Jonno_79:

    I'm going to go out on a limb here and predict
    that for the next 5 years or so we are going
    to have both inflation and deflation occurring
    at the same time.

    Inflation of commodities such as fuel and food

    Deflation of manufactured goods (including housing)
    which require financing.

    Not sure what happens to wage inflation.

    This will continue until the world economy
    rebalances, and emerging countries can
    buy more of what the West produces, be it
    manufactured goods or services.

  • Comment number 48.

    Privatise the profits, socialise the losses. An unmitigated disaster with unknown repercussions.

    No one, absolutely no-one, knows how this will end up. My guess is financial disaster for the US and, as a result, the western world.

    Overnight, the US national borrowings have, in effect, doubled from $5tn to $10tn. This either brings along a worldwide deflationary depression or a hyper-inflationary depression.

    You pays your money and you takes your choice. Happy Monday!

  • Comment number 49.

    #47, gunsandreligion

    For the UK economy the Bank of England (in the August Inflation Report) predicts that the cost push inflation should ease over the next year or so. This together with the spare capacity in the market that has opened up will cause the rate of growth to rise so it may not be as bleak as you predict.

    One thing I have noticed over the past few months, however, is that all the prognoses seem to get worse as time goes on. Therefore you may be right, I hope not though!

  • Comment number 50.

    I don't actually see this as doom and gloom, given the US housing market is bottoming out, and in the long term prices will rise the potential for a substantial profit exists.

    It'll be interesting to see how handing back Freddie and Fannie to the shareholders occurs - I would expect to see them broken up and re-packaged as several small and separate to avoid having so much private debt centralized.

    It's the same as having a gold reserve, except on a frightening scale for the time being. This is a house reserve, and how it gets handled may yet become a template for fixing the liquidity problem - *if* it works.

    The whole point of a market is to have several competing businesses keeping each other in check, and ensuring that if one falls, the rest can fill the vacuum and keep stability.

  • Comment number 51.

    I am wondering when everyone will wake up and smell the coffee?

    The whole economic system as we know it is on the verge of collapse.

    The takeover of Fannie Mae and Freddie Mac is just another desperate, but ultimately futile measure by the US Government.

    Likewise, the effective forced takeover of Derbyshire and Cheshire Building Societies by the Nationwide is a further indicator of how nasty things are about to turn.

    Let's get this clear once and for all, the reason the mortgage market has frozen is because the banks and other financial institutions are effectively bankrupt. They recklessly lent ever increasingly sums of money - money they didn't actually have - to people who couldn't afford it - and so created an unsustainable and dangerously unstable bubble, which had to collapse at some point.

    That point, unfortunately is now. No amount of tinkering or posturing by politicians on this side or that side of the point will do anything to stop the inevitability of the biggest financial meltdown since the Great Depression. The only question now is how it will play itself out, given that it was only WWII that ended the last one?

  • Comment number 52.

    Funny how these worldwide depressions tend to happen in cycles every 70 to 80 years... Apparently after each one central governments decide letting private institutions dedicated to profit have too much control over their economies is a bit risky and regulate everything out of existence and it takes about 3 generations for them to collectively forget or to be persuaded by their "friends" in business to deregulate to the point where it all kicks off again...

    for those students of history most worldwide recessions have ended pretty badly - the great depression of the 1920's and 30's lead directly to Hitler and WW2. The 1840's Railway crash in Britain spread to Europe and lead to a year of revolutions in 1848. The ecconomic upheavals in France in the 1780's (caused by too much military spending supporting American colonists against the English) lead to the French Revolution and Napoleon...

    on the bright side, after all these conflicts post war reconstruction booms invaraibly kick the whole cycle back off again... sleep well... ;-)

  • Comment number 53.

    I have been trying to work out who is the biggest fool .

    The salesman at the bank who calculates ways of lending money to people who will struggle to repay the debt and thus jeapordise the bank they work for.

    The borrower who calculates that if the good times keep on rolling that they may just be able to make the morgage repayments and live a modest life .

    The goverments that borrow heavily to give to the population in a feeble atempt to increase next months retail figures and mask the truth and delay the inevitable .

    Short term greed the view that life owes you and the look after No.1 approach have infected a generation which can only lead to misery. The institutions that encouraged this should be ashamed at what they have created .

  • Comment number 54.

    There are never only loosers, some win... Who won?

  • Comment number 55.

    Robert is very good as usual, despite what many posters think he does have the inside track.

    I am not sure though why he thinks Northern Rock is quite the deal for us. The numbers don't compare well.

  • Comment number 56.

    £3000bn? I'm kind of hoping there's an order of magnitude error there.

    If not then it's getting towards what Dirksen (allegedly) called "real money", or "a lot" in terms normal people can understand.

  • Comment number 57.

    I am amazed at how much the economy reminds me of the old pyramid money making scheme.
    It all crashes and the people at the bottom lose their money.
    The people at the top walk away with a full hand.
    It was a big pyramid this time.

  • Comment number 58.

    By "Simple Math's", people "Cannot Repay their "Debt", estimated@1.3Trillion "Unsecured"! Therefore what is the "Point of Underwriting Secured Debt"? on inflated "Property Prices"?
    You "Reap what you Sow", Sell Bank Shares Now!

  • Comment number 59.

    #53, chimichuri...

    The biggest fool is always the last one.

  • Comment number 60.

    Strangely enough all BBC news reports this morning have focussed on how this will get the UK housing market on the up again. There seems to be little understanding that this was a bail-out of last resort and that even Bush (if I remember correctly) said that the financial system was only 2 weeks away from complete collapse.

    Maybe the BBC is merely reflecting the country's obsession with rising house prices, (though the obsession is certainly supported by the current government), but isn't it about time it's reporting became more even handed?

  • Comment number 61.

    Are all those banking executives responsible for their organisations' disastrous leanding policies going to be allowed to keep their massive bonus? Of course they are.

    Until it hurts their own pockets and they stop receiving obscene bonuses related to profit and made to pay for bad decisions; the merry-go-round will continue and be guaranteed by the biggest bank in the world- the actual money in each person's pocket.

  • Comment number 62.

    So the real truth about Friedmanism, laissez-faire and free markets is...let everyone else in the world suffer collapse, recession, poverty, social instability, all in the name of letting the markets work it through.

    But if it happens to you???....er, what was it that Keynes said we should do??!!!!

  • Comment number 63.

    It seems to me that the financial problems we keep getting are being solved by taking the instituttion that is in difficulty and putting it under the umbrella of a bigger institution which hopefull has enough retained profit-synergies to deal with the smaller fishe's problems

    Where this gets difficult is when there are no more bigger fish.

    We now have the US government as the big fish and if it is not big enough then we have melt down

    Of course it will be big enough as it will just print more dollars,which will become worth less.

    The result of that must be, at least, massive asset inflation which in turn must lead to general inflation. After all an asset must produce a return must it not?

    It really looks a bit like the Weimar republic to me.

    Gold bars under the bed might work!!!

  • Comment number 64.

    Fanny and Maggie's situation was 'feared' worldwide even way back in the 1970's. It has been of 'concern' since then. So "who can I trust?"

    This is important because 'economies' are about what can be done and provided for how little and 'markets' (which decide on 'economies' being successful) are all about who has what confidence in what[ever].

    I left the 'pensions' scene because after the 1970's and after Maxwell's and [our] Maggie's antics I lost confidence in buying into a product I was suppose to rely on in 30 or more years time. Since then we have seen old names in the traditional 'club' of financial institutions 'go to the wall'.

    I'm just a little guy holding onto the little things around me - perhaps we would call it 'my little hubble'.

    My opinion now, at the age of 62, is that the people with the 'big' ideas are as dangerous and put entire nations (their peoples and their economies) at risk just as in a catastrophic way that dictators did and still do. They will happily drive their commercial tracked-vehicles over my little 'hubble' just as the military would of a dictatorship would do.

    Who do I trust? - certainly the carver of their ivory desks!

  • Comment number 65.

    Is Milton Friedman's legacy finally dead?

  • Comment number 66.

    Hi Robert,

    How can a company which has paid it's chief executives a whole pile of money (and I do mean a whole pile of money) be bailed out by the taxpayer?

    The whole concept of 'too big to fail' is hogwash. It is merely a smoke screen which allows Hank Paulson to bail out his Wall street buddies and the ordinary taxpayer to suffer as a result of their (Fannie and Freddie) dodgey lending policies.

    Both companies should be allowed to go to the Wall. The results may mean short term pain, but after a credit binge the likes of which the world has not ever seen there will be some pain. All this is going to do is paper over the cracks in the system and encourage more risky 'government sponsored' lending practices. The intrinsic problems with the US economy (being that of too much consumerism and not enough industry) are being papered over and the entire world stands to loose (in the long run) from this decision.

    Mr Paulson has made a very bad decision and although it will not come back to haunt him (he approx sold $500m shares in Goldman when he joined the Treasury, the proceeds tax free) it will be a major problem for the US for at least the next 20 years. I predict the US will suffer a recession the equivalent of what Japan has suffered.

    Government funds for social security deficits and normal government activity will be taken up propping up these liabilities. In the US, Chapter 11 is there for a reason. If the Chinese and other debtor nations who bought this junk to fund the US consumer binge loose some money, then so be it. Maybe they will also be forced to re-examine their lending policies.

  • Comment number 67.

    So the US bailout means that the markets are rising rapidly and by a pure co-incidence of course, the London Stock Exchange dealing site has "gone down" thus preventing private investors taking part. No doubt the institutions are not equally restricted. See for example Hargreaves Lansdown or idealing for the source (you'll need a trading account).

  • Comment number 68.

    The Northern Rock crash and the Fannie/Fred crashes prove to me beyond a shadow of doubt that banks tell governments what to do and not the other way around. The sucker tax payer is the guarantor of all bad deals that banks make and no matter how bad things get for banks they know they can tell the government to rescue them. Therefore, the government of any country is actually the banks' insurance policy, kept intact without any premiums to pay!

  • Comment number 69.

    NewtonJ

    No surprise at all. Of course when it all blows over, they can re-privatize Fannie and Freddie with lots more dirty money and massive bonuses all round.

    Except, of course, for the poor mug taxpayers who just pay for it all......with no benefit.

  • Comment number 70.

    Has anyone yet considered how the US Government is going to pay for all this? It is, after all, way over its own overdraft limit. As tempting as it must be to the financially incompetent Bush Administration, printing more money won't help and neither will legislating away the Government Debt. If they try, the prospect of the US Government being declared bankrupt becomes more than just a theoretical possibility. Raising taxes this close to an election would not do McCain's chances any good at all and to raise a couple of Trillion would need a huge increase any road. Now get out of that.

  • Comment number 71.

    Does anyone have the faintest idea of how we might reclaim the vast sums of money paid out in bonuses to the guys who created this fiancial disaster?

    If I robbed a Bank and still had the proceeds there would be a mechanism for getting the money back.

    How about a winfall tax on incompetent, greedy people who have screwed up the world's fiancial system?

  • Comment number 72.

    Robert

    Who was your source yesterday for "today's" announcement of the Nationwide takeovers? You make it sound as if it was the FSA. I hear that the Nationwide may have been surprised by the BBC advance announcement. They have posted an announcement TODAY so someone obviously leaked the story - so who, why and is it just another total co-incidence that it came to light just as a far bigger US story emerged that would get most press attention?

  • Comment number 73.

    What's happened to the information from the Stock Exchange, no online info since around 9am.
    Has their system crashed?

  • Comment number 74.

    Printing money.
    Time to return to the gold standard?
    Though gold goes up and down in value too.

    Economics gives me a headache. How about the end to all borrowing everywhere and just have real money only THAT EXISTS.

  • Comment number 75.

    There won't be any 'recovery' in the UK housing market because of this. This idea is pure fantasy.

  • Comment number 76.

    More of a takeover at zero by Nationwide, than a merger.
    Cheshire + Derbyshire must have some net assets on their book, so can't understand the no windfall situation?

  • Comment number 77.

    W'eve had the seven fat[cat let out of the bag] years 2000 -2007 which turned out to be a strong delusion to those who would believe a lie.

    Now we will have the seven lean years[the tribulation] 2007-2014 where central banks will mop up wealth in exchange for food stuffs and low interest treasuries ,thus reestablishing their position at the top of the food chain .

  • Comment number 78.

    Robert,

    The conversation I don't hear happening. The words I don't hear people speaking are...Perhaps this model of encouraging more and more private home ownership is nearing its end. Perhaps we need a more grown up conversation about Social Housing than the current incumbents in the White House and No 10 have the appetite for.

    Perhaps there is a different story we should be telling?

  • Comment number 79.

    The trading position of both the Derbyshire and the Chesire was no longer viable, ala Northern Rock, but for slightly different reasons.

    Hence no payout / windfall.

    Anyone expecting one is no better than a 'fat cat banker' getting his golden kiss off as he leaves a failing company.

    Ironically, the Nationwide solution is pretty much what Lloyds TSB offered to the Northern Rock situation...

  • Comment number 80.

    #76 hudjer

    "Cheshire + Derbyshire must have some net assets on their book, so can't understand the no windfall situation"

    You must also consider the contingent liabilities of the Cheshire + Derbyshire as well. Cheshire + Derbyshire need to be able to raise money to continue in business and it seems that their cost of borrowing is too high for them to remain independent. The FSA obviously considered the societies to be unable to function on their own so I guess that their assets less all their liabilities is about zero. But I haven't seen the figures. (and I don't know that we ever will.)

  • Comment number 81.

    As with most things timing is everything. It can be no coincidence this was announced the weekend following 6%-7% falls on world stock markets. The Fed has since last August announced 'something big' after everyweek of 5%+ weekly falls on the Dow. And Fed is terrified of a stock market crash á la 1987.

    It is intresting that this has been regarded as good news by the markets while in reality it indicates that there is an ongoing systemic crash of the Western financial sturcture gathering in progress. When you increase the US national debt, by a third, overnight that tends to have a large negative effect on the desirability of US debt, there being so much more of it! And the US will be probably be printing a shed load of more Dollars as we speak to help inflate some of that debt away.

    Are the central banks going to keep open their SLS's beyond October (Maybe Robert you'd like to ask the BoE inparticular).

    The net effect is that when the air of negativity returns, by Friday at the latest :o) it will be with avengence, deeper and far more pessimistic than before. Ask yourself this... Let's suppose Lehman Brothers are still in trouble, can the Fed afford to rescue them if they are? And if not them then who else will be left to swing alone?

  • Comment number 82.

    All is clear ....
    - If you owe the bank £1000 its your problem
    - If the debt is £100 Million its the banks problem
    - If the debt is £100 Billion its the taxpayers problem

  • Comment number 83.

    The Dow Jones have not rallied, it was higher 2 days ago. It was 11,600 on the 6th Sept and now it is 11,115 (15:23 BST.) post FMAE/MAC nationalisation

    So not everyone thinks this is the silver bullet that it is......only in the UK and Non US territories are there a rally

  • Comment number 84.

    #60

    "There seems to be little understanding that this was a bail-out of last resort and that even Bush (if I remember correctly) said that the financial system was only 2 weeks away from complete collapse."

    Probably now moved to about 2 months before complete crash.

    You read it here first!!!

  • Comment number 85.

    DearRobert
    Fanny Ma and co nationalised, shut down of LSE

  • Comment number 86.

    DearRobert
    Fanny Ma and co nationalised, shut down of LSE Brown holding Cabinet in Birmingham, WE AINT HEARD THE LAST OF THIS FIASCO YET, looks like LSE has been caught out?

  • Comment number 87.

    What I find really peculiar is that a building society like the Cheshire, can be merged like this with no consulatation with the members, who are after all the owners.

    I've had money invested in the Cheshire (originally with the Northwich until it merged with the Cheshire) since shortly after I was born, i.e for almost 50 years. I thought the whole point of a mutual society was that it was owned by its members, but it seems that the owners' rights can be totally ignored. It is absolutely outrageous.



  • Comment number 88.

    "13. At 5:18pm on 07 Sep 2008, welshrams wrote:

    More doom and gloom from Peston.
    BBC just reported that this will stabilise the markets with the FTSE rising tomorrow.
    I dont believe a word of any of these experts especially Peston"

    195 points up as I write this. Peston 1: Welshrams 0.

  • Comment number 89.

    #87 is correct. In any situation where you have members, you wouldn't expect to hear you have merged with your rivals, and members not be involved in the process somewhere.

    Were the Directors just offered a take it or leave it deal.

  • Comment number 90.

    Banks, Institutions, Governments.

    They all seem to be playing a game that ordinary people don't understand.

    But we're in awe. We accept their lamentations. We continue to pay the price for their folly.

    Maybe we just love being the victim in all this.

  • Comment number 91.

    #88

    Surely welshrams was intimating that he thought the blog from Robert Peston was overblown and he cited the BBC's prediction that the markets would go up as proof of that.

    The fact that they have means welshrams has been vindicated.

    In any case, that's how I read his comment.

  • Comment number 92.

    #87... it's things like this that indicate, perhaps, the real activity and anxiety bemeath the placid surface of would-be anodyne press releases.

    I think you're absolutely right about consultation ..but I guess there was no time, and having learnt from Northern Rock they wanted on this occasion, that the action not be "open", or ongoing, but be a past-tense, completed event.

    So in whatever timeframe "they" ( a great conspiracy theory word!!) feel best ...no doubt the reasons will be given but however alarming they will have the non-panic inducing quality of being "not ongoing"--and "they" know (at least they have now understood better that while newspapers don't like "past events" so much as future possibilities---on TV and the internet they are even less reported upon.

    Sorry to get all "news management" about this---but the go-ahead for the creation of such faits accompli was probably the massive consensus that 'something should have been done' behind closed doors with Northern Rock, to avoid the panic.

    So now everything will be done behind closed doors---whether it avoids panic or not I suppose will be shown in the next few months.

  • Comment number 93.

    You are witnessing the fundamental failure of the free maket economy.

    Karl Marx said Capitalism was unsustainable - he just got his timings wrong. He would be chortling to himself watching the worlds biggest Capitalist economy nationalising the two biggest financial institutions in the world.

    P.s. Temporary?? - We'll see....

  • Comment number 94.

    Common Good, 3, Free Market, 0.
    Common Sense 5, Political Dogma

  • Comment number 95.

    While I'm sure that customers of Cheshire and Derbyshire will be pleased to have the financial strength of Nationwide behind them they have a number of reasons to be less happy. Not only will they not get any bonus on merger but neither will they get access to Nationwide branches and services.

    It seems strange that Nationwide seems keen to retain the names as separate brands but has no intention of driving through efficiencies and improved customer service by fully integrating the back office too. Could there be a hidden agenda here?

    The government is certainly keen to keep unemployment down and redundant call centre staff wouldn't help that.

    Ironically if Nationwide were a listed company, not a Mutual, its Shareholders too might be asking why it is not maximising merger benefits.

  • Comment number 96.

    This week's matches, (Mae-Not-Gone-West-with-the Windsock-Hurricane-Mac league) now with New Improved Govt "Hour 11" sponsorship), scores after 10 mins:
    *(First mentioned are - unprecedentedly - playing at home)
    Division 1
    Common Good, 3; Unfettered Free Market, 0.
    Common Sense, 6; Political Dogma, 1.
    Common People, 5; Self-seeking, 2.
    Sustainable Future 2; Collapsing Piles, 2.
    Division 2
    Long Term View, 4; Short Term View 0.
    (Optician called onto the pitch, real fog rolling in, maps and histories hurriedly dug out of bins, and progressive new fangled marketing mist machines examined for malfunction, none found, working perfectly)
    Suppliers of Hope, 3; False Optimism 3.
    Expectancy, 2; Purveyors of Gloom, 1.
    Reasons to Dance, 7; Numb Passivity, 1

    Hot air is expected to prolong the half-time break, but pundits are rumoured to be seeking treatment (for compulsive nit-picking), which may at least cool heads before the "three-quarter cake is better than no cake" bell. The referees have been more involved in the games than anyone can recall. More exciting action after this specially shortened commercial break (Noises off)

  • Comment number 97.

    Fannie and Freddie actually own close to 80% of the mortgage paper in the U.S.
    10% of loans are in default and 20% of subprime loans are in default. The American taxpayor has been setup. And the Treasury chief is doing everything in his power to protect banking interests. I'm not sure that what he is doing is even legal. Is this the same Paulson that was quoted in Mid-Summer assuring the fiscal stability of Fannie and Freddie. What changed in less than 2 months? There is not enough public or available private money to fix this situation. This republican administration has committed more acts of treason and outright fraud and theft of the TAXPAYOR EVER SEEN IN HISTORY. The average American is simply too stupid to realize it. Maybe they will wake up when local governments start closing down public schools. It won't be an issue of the quality of education but rather whether there is any education at all. Besides, can we really take the education level of an American 12th grader seriously. I would be hard pressed to offer the average high school senior in America a cashier's job. We are going to see more weeping in this country than ever before. The social implications are frightening. We are going to beg for the bread lines of the Great Depression

  • Comment number 98.

    I see with Lehman Bros running out of options the $100 Billion bounce lasted about 36 hours......

  • Comment number 99.

    As a Derbyshire saver I am astonished to hear of the difficulties the society is facing - I can glean no negative sentiment from the last annual report and accounts (2007) and, with the benefit of hindsight, find the annual report to be on no value whatsoever.

    Is it not incumbent for all financial institutions to present meaningful information to their shareholders (members) that accurately reflects the true health of the organisation?

  • Comment number 100.

    As a member of Derbyshire Building Society, I have recently received a Merger Notification Statement for the propsed merger with Nationwide. While I fully understand why there is to be no bonus for members, I am at a loss to understand why the directors of Derbyshire Building Society who have been responsible for the demise of the business are to be rewarded with up to 6-figure termination payments.

    Is it not time for the highly paid directors of failed financial institutes pay for their mistakes by being stripped of all golden farewlls, bonuses and termination payments as well as being required to repay recent previous bonuses?

 

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