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

By: Nadeem_Walayat

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

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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

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