Skip to comments.We're All Homeowners: Nationalization of Fannie, Freddie Unavoidable
Posted on 07/10/2008 9:33:59 AM PDT by BGHater
Fears about Fannie Mae and Freddie Mac retreated somewhat Tuesday after their federal regulator, OFHEO Director James Lockhart, said new accounting rule changes should make "no difference in the risks of the two firms."
On Monday, Freddie and Fannie shares plummeted after a Lehman Brothers analyst said a new FASB rule could require the two firms to write-down as much as $75 billion.
Rather than the accounting rules, what's really got investors spooked is a growing realization the government will have to nationalize Fannie and Freddie, says Kevin Depew, executive editor of Minyanville.com.
The two mortgage lenders are simply too big to fail and too critical to the housing market, Depew says. Given Fannie and Freddie own or guarantee 50% of all housing debt, according to the WSJ, continued stress on their balance sheets means higher borrowing costs for the firms, and ultimately higher mortgage rates for individuals. It also means another round of write-downs for the battered financial sector generally, which owns a lot of Fannie and Freddie-backed paper.
But nationalizing the firms, each created by an act of Congress, would mean a wipeout for equity holders, who have already seen their holdings decimated in the past year.
(Excerpt) Read more at finance.yahoo.com ...
Anybody surprised by this, stand on your head.
Much worse. Because when I’ve thought about this, there is nothing short of a massive de-leveraging operation going on in the markets now. No one wants to loan to anyone else.
Trouble is, putting all of this leverage onto Uncle Sammy’s shoulders would make our deficits and national debt balloon to sizes seen only in nightmare scenarios.
People in high places (eg, inside the Fed, and Poole isn’t the only guy) have been saying for 10 years and FNM/FRE are unsustainable. In 2005, it was clear that their books were a shambles. And Congress’ idea of a “housing bailout” has been to allow Fannie to take on ever-larger “conforming” loans from places where housing is overly inflated.
Right now, the pay-option ARM’s are starting to reset. The foreclosure rate is going up and now we see the effects of reduces tax revenues on states and counties.
All the people who kept saying “Oh, sub-prime is overblown, this is all a media conspiracy” better think hard about what happened to the GOP the last time we went through this. The GOP was out in the cold for an entire generation, until the 50’s.
Thinking about the rational being given for the above statement (too big and important to the economy to be allowed to fail -- so they will nationalize them and put them in a constant state of failure and taxpayer support). Maxine Waters must be correct about the need to nationalize big oil. How about GM, GE, Wal-Mart, Big Pharmaceuticals, etc.? For that matter, The New York Times has an editorial policy that is so important to the soon to be rulers that it must be guaranteed against failure.
How accountants change where they post numbers to Income Statements and Balance Sheets makes no difference to the economics of the underlying business.
If the business is the same under new and old accounting methods, then economic value of the business has not changed.
The point is that cash flow is king. Only actual changes to the current and prospective cash flow of the organization change its value.
None of which is to say that Freddie and Fannie are smart, politically neutral, or low risk. They are probably stupid risky political hacks.
Freddie and Fannie are constantly betting Trillions of your dollars with all the upside privatized to themselves and all the downside socialized to you.
They win, you lose.
I’m beginning to think that a big part of our problem is the Lehman Brothers.
Are we really that stupid? Does anybody not realize that the federal government has NO Constitutional authority to do this? This is not a socialist country for Christ sake!
Obviously meant Smoot-Hawley
“No one wants to loan to anyone else.”
Thats been going since fall of last year when banks started hording cash and raised rates on jumbo loans.
FRE/FNM might of survived, but they became the final destination dumping ground for all the toxic waste that banks were looking to unload. Its finally catching up with the system.
The moral of this morass: eliminate the mortgage interest deduction once and for all.
It would have been so refreshing if everyone could have admitted that government at all levels has messed up big-time. They have allowed the expanding of the credit to unheard of limits in order to give us a false prosperity and get themselves reelected time and time again. The debt has now come home to roost.
More to do with the likelihood Congress will come up with a bailout plan to go with the takeover of bad paper.
Fannie and Freddie are great lobbyists so soon something will be done short of an outright “nationalization”.
socialized housing, owned by the masses for the masses, how nice. :)
Everyone on FR should be reading Minyanville daily, it’s the best financial site on the net.
I’m still waiting for Franklin Raines to be perp walked. Notice that no one is talking about the greedy CEO during the period when this company went bad.
Wouldn’t have to do with Raines being a Clinton insider?
No difference between him and Ken Lay. Both profited greatly for leading their organizations to disaster.
So, now we shall have a socialized Real Estate Industry!
This was predicted numerous places some time ago.