Freddie Mac and Fannie Mae hit skid row on Wall Street
By RollingThunder Posted in Economy — Comments (2) / Email this page » / Leave a comment »
The MSM has already reported on the decline of Freddie Mac and Fannie Mae and its effects on Wall Street. Restating what has previously been reported is not my purpose here. My thoughts on this subject turn to the bigger picture.
The picture which I see when I read and hear of Freddie and Fannie is how big government has failed one more time. Those of you who read my work with any regularity know that I have a strong Federalist, Conservative belief system. Quoting the third President of the United States: "The government that governs least is the government that governs best."
Fannie Mae and Freddie Mac are funded by you and I, the taxpayer. If these two institutions (or is it programs?) need additional money to keep their "doors" open, it will come from our taxes. Government was not designed by The Founders to be "bail-out-central" for the American citizenry. Unfortunately since the days of The New Deal, this is what our government has become.
Cross posted at Bill's Threshingfloor
...because, like the Bear Stearns situation, it involves widespread overreactions to statements that are misleading and only marginally true.
The biggest one was Bill Poole saying that Freddie is insolvent now, on a current-market valuation of their assets. How many times did you hear that without attribution this week, as if it were true? But Poole has been grinding axes against F&F for years.
There's no one out there who believes that F&F's large debt portfolio is any danger. The worst you could conjure up is that housing prices will fall farther than expected and they will face maybe $50 billion in additional losses.
This doesn't require a taxpayer bailout. There are three or four sovereign wealth funds around the world that could guarantee that kind of money, this weekend. You might wake up Sunday evening (Monday morning in Tokyo) to find that someone has done just that.
F&F operate on the thinnest imaginable sliver of regulatory capital- less than two percent, by the back of my envelope, whereas your average commercial banker starts getting that kinda-naked feeling whenever he's below 8 or 10 percent.
They can do that because the government has always quietly let on that their paper wouldn't be allowed to default. Since F&F were founded (late Sixties, if memory serves, not during the New Deal), this extreme capital efficiency has amounted to a de facto subsidy of mortgage rates for American homeowners.
What we're really seeing now is that the Feds are going to be pressured to make good on the implicit guarantee. And that basically means that the equity of F&F is already worthless, while their bonds are probably more valuable than they were yesterday. And today's market action reflected that.
trillions.
A better option would be to privatize them, take a *SMALL* one time hit and don't indemnify the buyers.
The federal government has no business in either the mortgage business or the loan guarantee business.
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CongressCritter™: Never have so few felt like they were owed so much by so many for so little.