What does this mean?
It means the debt of the federal government just went up. By how much will be determined by how many loans go bust. It will no doubt be in the billions.
I believe it also means people holding stock in either corporation just lost their money, all of it.
It means tightened credit requirements...and possibly such a squeeze as to kill the housing market as banks fail to completely understand the requirements and loans are denied.
It means the taxpayer is going to bail out poor business practices.
It means alot of different things, but basically, we’re screwed!
For one example from the article: “Similarly, conservatorship does not eliminate the outstanding preferred stock, but does place preferred shareholders second, after the common shareholders, in absorbing losses. The federal banking agencies are assessing the exposures of banks and thrifts to Fannie Mae and Freddie Mac. The agencies believe that, while many institutions hold common or preferred shares of these two GSEs, only a limited number of smaller institutions have holdings that are significant compared to their capital.”
Sounds reasonable, and it is. The trouble is that many banks have their required reserves IN Fannie and Freddie “preferred stocks.” So, more banks will need to raise capital to replace the losses. Some banks will fail because of this. I have no idea how many. So, ultimately it means that the bank implosion continues.
It means the credit crisis is worsening. It means a recession is all but guaranteed. It means, the economy won’t turn around any time soon. It means housing isn’t bottoming, or those who hold bad loans wouldn’t be seeing increasing losses. It means we still lack transparency in banking and we still have no clue how much toxic paper is out there or where it is. Having Freddie and Fannie fess up to their toxic paper probably identifies a huge portion of it, since they hold half the nation’s mortgages. But where is the rest of it? Who knows? So the credit crisis just worsens and deepens and deflation keeps spreading.
It means, it is not a good time to blow your wad, but it is a good time to get out of debt and save a little in case you are one of those caught in rapidly rising unemployment.
a) had no reasons to be set up as GSEs in the first place, i.e. structured in a "Third Way" public-private "partnerships" advocated by New Democrats of DLC and Tony Blair in UK - because these partnerships' profits were great for "private" interests of management and preferred investors but the "corporate" debt was implicitly (ha!) guaranteed by the government / taxpayers.
b) were used by Democrats essentially as slush funds for "their people" (James Johnson, Franklin Raines, Jamie Gorelick, to name just most visible) and bad policy instruments by piling the debt into them and drawing profits in forms of dividends and salaries),
This shines the light on the danger of these structures for the taxpayers, which otherwise are masked by their "private" facade - profits are private for government-connected, risks and debt are public for everyone else - everyone gets to participate courtesy of government, unlike just the common shareholders in other companies.
Finally, now this implicit liability on [off-balance sheets of] governments' books that nobody paid attention to (similar to other obligations that government has but not officially in the "budget") will no longer be covert and cannot any longer be used by Democrats as unaccountable entry for their "unfunded mandates" for "community loan" programs etc. because the local banks and loan originators simply will no longer be able to pass the loans onto Fannie and Freddie without scrutiny.
This is a long overdue action of finally "divorcing" the "public", but unaccounted for [implicit, off-the books] debt from "private" profits, which will finally shine the light on loose standards and tighten the future loan requirements, which will now become accountable for by regulators / Congress, now in full public view instead of being farmed off to a "private" for-profit entity, which Democrats used the way they use government (like a slush fund and source of enrichment). Yes, there will be a pain, but it's already in process anyway, and liquidity will be granted to those who deserve it, as it should have been.
The subprime mess not only effectively shut down the home-buying market, it also turned off Fannie Mae's revenue stream. The company suffered huge losses in 2007 and predicted the same for 2008, when the federal government stepped in. Its management team was reshuffled that year. The company's position is controversial, with critics and competitors saying its federal charter gives it an unfair advantage in attracting investors and bulding market share. The company is no stranger to bad news or bad press. In 2006 federal regulators hit Fannie Mae with a whopping $400 million fine. Investigators claimed that the company's former executives willfully overstated earnings by more than $10 billion -- and then tried to impede an investigation into the discrepancies -- in order to reap performance bonuses. CEO Daniel Mudd and chairman Stephen Ashley were brought to task by the Senate Banking Committee that June in regard to accounting misdeeds. The Federal National Mortgage Association, or Fannie Mae, is a public company operating under federal charter. It is the US's #1 source for mortgage funding, financing one of every five home loans. The firm, like brother Freddie Mac, provides liquidity in the mortgage market by buying mortgages from lenders and packaging them for resale, transferring risk from lenders and allowing them to offer mortgages to those who may not otherwise qualify. As with its private-industry cohorts, the company was hit hard by the subprime mortgage crisis of 2007 and had to be rescued by the Federal Reserve.
(Source: D&B)
That those responsible for the mess walk away with profit and/or perks, and we pay for it. That a bunch of people should be whipped but won't be.
It means you’ll see 5 1/2 percent interest rates in 6 months or less.