Fannie Mae, Freddie Mac- The Mother of ALL Bailouts!

Housing-Market / Credit Crisis 2008 Jul 13, 2008 - 07:35 PM GMT

The US Government has gone all out to perform a full scale rescue of Fannie Mae and Freddie Mac to prevent a collapse of the US financial system. The move follows Friday's near collapse of both companies stock prices which saw shares of the too big to fail institutions plunge by more than 50%.

In a joint move the White house and Federal Reserve issued a number of initiates aimed at supporting both companies which include -

The Fed's board of governors voted to open up its emergency discount window to Fannie Mae and Freddie Mac.
The Treasury is seeking powers to enable it to buy unlimited stock of both companies and therefore injecting capital.
Congress to provide immediate funding at $2.5 billion per company

The full statement:

Washington, DC-- Treasury Secretary Henry M. Paulson, Jr. issued the following statement:

Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies. Their support for the housing market is particularly important as we work through the current housing correction.

GSE debt is held by financial institutions around the world. Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets. Therefore we must take steps to address the current situation as we move to a stronger regulatory structure.

In recent days, I have consulted with the Federal Reserve, OFHEO, the SEC, Congressional leaders of both parties and with the two companies to develop a three-part plan for immediate action. The President has asked me to work with Congress to act on this plan immediately.

First, as a liquidity backstop, the plan includes a temporary increase in the line of credit the GSEs have with Treasury. Treasury would determine the terms and conditions for accessing the line of credit and the amount to be drawn.

Second, to ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes temporary authority for Treasury to purchase equity in either of the two GSEs if needed.

Use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer.

Third, to protect the financial system from systemic risk going forward, the plan strengthens the GSE regulatory reform legislation currently moving through Congress by giving the Federal Reserve a consultative role in the new GSE regulator's process for setting capital requirements and other prudential standards.

I look forward to working closely with the Congressional leaders to enact this legislation as soon as possible, as one complete package.

Mortgage giants Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation), represent 50% of the US mortgage market in terms of loan guarantees of over $5 trillion. Officials calmed markets following the Friday morning crash, after statements that the two banks were able to finance day to day borrowings which is now clearly not the case hence the mother of all bailouts.

Charts Courtesy of Stockcharts.com

With the US housing market bottom no where in sight there exists the potential for financial catastrophe on the collapse of Freddie and Fannie as the US would be forced to take on liabilities of more than $5 trillion therefore increasing the national debt by 54% from $9.4 trillion to 14.5 trillion which would result in severe consequences for the US dollar and the US bond market in terms of loss of confidence. Therefore setting the scene for a US recession turning into a Depression. The question now is exactly how much losses will the US tax payer sustain over the coming years, one things for sure it can be measured in the several hundreds of billions

By Nadeem Walayat
http://www.marketoracle.co.uk

Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

Comments

Bill
13 Jul 08, 22:02

Strange names

Fannie and Freddie, what strange names for such important firms ?

Michael
14 Jul 08, 12:25

Freddie and Fannie and the broader Housing Solution

This bailout of Freddie and Fannie is counterproductive. Another congressional initiative, the Mortgage Bailout, will tax Freddie and Fannie to the tune of $530 million/ YEAR. So Congress wants to bail out an institution and tax it as well? What’s going on? Call your senators/representatives and tell them: Back off the Mortgage Bailout Bill and Back off Bailing out Fannie and Freddie Mac!

http://www.freedomworks.org/newsroom/press_template.php?press_id=2585

Blue Dog House

Duric Aljosa
14 Jul 08, 16:44

Bailouts!

Bankrupt - A person, firm, or corporation that has been declared insolvent.

Bankruptcy - The condition of being unable to pay debts.

Recent Ufo Report: Unapproachable Financial Obligation.

Only logged in users are allowed to post comments. Register/ Log in

The Market Oracle is a FREE Financial Markets Forecasting & Analysis web-site.
(c) 2005-2024 MarketOracle.co.uk (Market Oracle Ltd) - Market Oracle Ltd asserts copyright on all articles authored by our editorial team and all comments posted. Any and all information provided within the web-site, is for general information purposes only and Market Oracle Ltd do not warrant the accuracy, timeliness or suitability of any information provided on this site. nor is or shall be deemed to constitute, financial or any other advice or recommendation by us. and are also not meant to be investment advice or solicitation or recommendation to establish market positions. We do not give investment advice and our comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to enter into a market position either stock, option, futures contract, bonds, commodity or any other financial instrument at any time. We recommend that independent professional advice is obtained before you make any investment or trading decisions. By using this site you agree to this sites Terms of Use. From time to time we promote or endorse certain products / services that we believe are worthy of your time and attention. In return for that endorsement and only in the cases where you purchase directly though us may we be compensated by the producers of those products.