Sunday, July 13, 2008

Taxpayers Bailing Out Freddie And Fannie?

Every now and again someone brings up discussion about the Federal Government owning stocks outright.

Usually people lose they minds within seconds of the subject being breached.

The usual way this enters conversation is when people try to figure out a way to save Social Security.

You see, there are some pretty huge pension funds in this country - CalPERS, TIAA-CREF, and so on, who DO own pretty signifcant equity positions (stocks) and arguably do a better job providing for their retirees than Social Security ever will.

However, there's word floating around just today that the Federal Government just might buy stock in Fannie Mae (FNM.N) and Freddie Mac (FRE.N) to keep them from COLLAPSING.

Yes, boys and girls - pretty much what has happened is that the collapse of the housing market has finally taken ol' Fannie and Freddie by the throat. Sometime Wednesday going into Thursday various anlayst comments started making the rounds that these two are completely, utterly, and absolutely INSOLVENT. There's a particular Barron's article that seems to be the commentary of record on this topic - Failure Is Not an Option For Fannie and Freddie". It, in turn, appears to be based on commentary from former St. Louis Federal Reserve President William Poole who calculated that Freddie and Fannie owe $5.2 billion more than their assets are worth under fair value accounting rules.

There was pretty much NOTHING else on CNBC all day Friday.

Now, there's been an implied, although certainly not statutory, guarantee that if these two ever did start to go under that the Federal Government would bail them out and it looks like that's exactly what's going to happen.

But, let's consider precisely what this means.

Now, in the event of what's looking to be an unprecedented financial storm where people are losing their houses at a faster clip than they were in the Depression, you'd think the Federal Government would respond at least to the extent that they did at Katrina - at least provide some trailers or something of the sort.

Oh, NO - this bail-out is not about HOME owners, it's about BOND owners.

You see, with the explicit support of the Federal Government, Freddie and Fannie have been selling bonds based on mortgages that have very little remaining value at this point. For starters, alot of people don't have work to pay their mortgages. If people can't pay their mortgages, Freddie and Fannie can't pay their bond holders.

Now, is the Federal Government going to set up a program to help people pay their mortgages so that Freddie and Fannie can, in-turn, pay their bond holders?

HELL no.

They're going to pay these mainly super-rich bond holders DIRECTLY to keep them from going into an uncontrollable panic and completely seizing up the economy.

Of course there's only one way to do that - pretty much by printing money.

You think $4/gallon gas is bad?

You think $2.50/loaf of bread is bad?

You think $3/gallon milk is bad?

You ain't seen NOTHING yet.

I'm betting we see $10/gallon at the pump by July 4, 2009.

We may very well be headed for a Germany/Yugoslavia style hyperinflation.

This government has sent the undeniable signal they're going to keep pumping money into this system as fast as the fat-cat investors can waste it.

If we had the slightest bit of guts, we'd cut them ALL off. Get someone's hopes up that they can afford a nice house when they really can't? These investors DESERVE to be ruined and standing in the bread lines with the people they tricked.

Every last one of them.

Related:
Feds Open Credit Window to Fannie, Freddie - CNBC
Treasury, Fed to help prop up mortgage giants - MSNBC
Fannie and Freddie Update! Judgement Day Tomorrow - The Housign Time Bomb

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