SeriousBull

Fannie Mae & Freddie Mac: Too Big to Fail!

Tags: Bailout + Economy + Fannie Mae + FNMA + Ginnie Mae + Too big to fail + Treasury

Any day now Treasury will bail out Fannie Mae and perhaps Freddie Mac. Together these quasi-government entities guarantee or own an estimated $12 trillion in US mortgages. They are in other words too big to fail.

SB has long ago advocated that US Government officials need to stop making reactive policy decisions and become proactive. SB is the only financial journal that has tried to open up the discussion of looming losses at Ginnie Mae which, unlike Fannie Mae and Freddie Mac are direct obligations of the US tax payer. Our solution was and remains to access the risk of failure, put the private firms into conservator-ship cancelling t all the stock (too bad it can’t just be exective management’s stock), and capture the upside from the US tax payer who will foot the bill for the losses.

 So here we are having bailed out Bear Stearns by giving a guaranteed loan loss deal to a private company (JPM) and soon will payout more pubic US taxpayer dollars to save two more private companies that are too big to fail. Has the government seen the light?  Will they salvage value for the dollars spent mitigating US taxpayer losses? They had better start thinking like businessmen and expect payback. More importantly they better look a little further ahead and realize that they are setting up an environment for major pain by simply printing money. The US has somewhere around a $10 trillion deficit that is growing and becoming a greater percentage of its GDP as the economy contracts. Its time to be proactive and realize our vulnerabilities–more debt to come, more deficit spending needed, little ability to increase tax revenues in a contraction, and the biggie, debt service problems if interest rates climb.

July 11, 2008 - Economy, Politics