US Government takes over Fred and Fannie

Next time someone mentions it would be a good idea to set up an Aussie mac clip them over the head to wake them up and then show them this:

The Bush administration seized control Sunday of troubled mortgage giants Fannie Mae and Freddie Mac, aiming to stabilize the housing market turmoil that is threatening financial markets and the overall economy.

Treasury Secretary Henry Paulson is betting that providing fresh capital to the two firms will eventually lead to lower mortgage rates, spur homebuying demand and slow the plunge in home prices that has ravaged many areas of the country.

The huge potential liabilities facing each company, as a result of soaring mortgage defaults, could cost taxpayers tens of billions of dollars, but Paulson stressed that the financial impacts if the two companies had been allowed to fail would be far more serious.

“A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance,” Paulson said.

But more importantly, “Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe,” he added in a televised announcement.

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.

These schleps were leveraged 35:1!  And the senior staff received large bonuses for writing business and expanding the balance sheet.

Update:

There are actually are people referring to this as another example of market failure. Fred and Fannie were nothing other than two socialist beasts and some have a hide to call this another example of the failure of free enterprise system. It just boggles the mind just how mendacious or stupid some commentators can be.

Update 2

One commenter/blogger has now is implying market failure because the market wasn’t able to bail out Fred and Fannie without government assistance. This is more insane than the earlier suggestion.

15 thoughts on “US Government takes over Fred and Fannie

  1. It seems that the powers-that-be will do anything to keep people borrowing, and housing prices outpacing inflation.

    This raises all sorts of questions:

    Without trying to guess their motives- What’s the end result likely to be? Intra-generational mortgages? Some form of serfdom? A complete and total collapse of the economies the western world? If the latter, what can follow that besides a world war for resources nobody can afford to buy?

    Or, are the continual government-sponsored bailouts simply a slide into nationwide socialist nationalised housing?

    What nation will eventually have the balls to call in America’s debt?

    Are we suffering through the (bound to be painful) end of debt-based currency?

  2. They’re tipping in $200 billion hoping it will stabilize things. My bet is that it just might, but these two socialist monsters will hopefully never ever rear their ugly head again. This time I hope the US government has learned a very well deserved lesson.

  3. “This time I hope the US government has learned a very well deserved lesson.”

    The test will come soon — I notice GM and Ford asking for free money too.

  4. I don’t think the government will help those two as it would be getting itself into a right royal mess.

    GM and Ford are basically health care companies making cars on the side at a loss. They’ll go into chap 11 dramatically change the heath care deal through the courts recap and start again. They’ll be great companies to buy into once they come out of Chap 11 and recap. I’m dying to own GM and Ford as I think the eventual recap will get done dirt cheap.

    Stripping out the health care mess they could actually be very profitable firms. They make shitty cars for middle America but so what as long as they sell enough of them.

  5. They’re tipping in $200 billion hoping it will stabilize things

    i’m not sure they are, jc. my read of this is that they are tipping in just $1bn and hoping.

    market seems to love it, but i bet we’ll be making new lows next week.

  6. They’re committing, I think. Yes that’s the little different. Thanks pom.
    Good call on stocks a few months back by the way.

  7. And today its September 10th, and we’ve learnt that the market *doesn’t love it*.

    Wall St down 2.5% overnight.

    It would have been great if 10 months ago, the Fed, the Treasury and the government just sat on its hands and let the market liquidate the failing institutions. No bail outs, no corporate welfare, no discount windows, no loosening of the quality of securities that can be exchanged for liquidity.

    This is socialism for the rich.

  8. Oh and if anyone thinks that the failure of Fannie and Freddie is a market failure, please go and read their charters. And read about the Home Ownership Bill passed in 2005 in Washington.

    These monstrosities were sponsored and regulated to provide cheap abundant credit for home ownership.

  9. Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe,”

    Being an economic ignoramus I have o ask a stupid question: is there anything to the above statement?

  10. Lehman next to go? results brought forward to 7:30 EST today, KDB pulled out of takeover talks yday, noone else wants to know, JPM already has Bear and is wondering why, Citi hasn’t got the cash, BoA hasnt got the balls, Deutsche ruled themselves out this morning, Leh stock down 44% yesterday, ‘the Fed must bail out lehman’ says ECM analyst, ‘it’s too big to fail.’

    and GM and Ford have their hands out for more cash (they’re asking the Feds for $50bn) ……at $780, buy as much gold as you can.

  11. Pom

    Lehman has an investor phone hook up conference this evening which you can get to by following the links on their website. Going to be interesting. The rumor mill in the far east was suggesting that they have done some sort of deal with the Koreans.

    lets see.

  12. There was an interview on BBC world today where the economist being interviewed stated that due to the size of the debt in Fannie and Freddie it would have the same level of impact as if another first world country’s economy collapsed.

Comments are closed.