Monday, July 14, 2008

About Freddie-Fannie Bailout

As most of my readers have probably already heard, the U.S. government has offered a bailout of mortgage agencies Freddie Mac and Fannie Mae.

I always believed that the U.S. federal government would do anything to stop them from collapsing, and this is of course exactly what they're doing. Seemingly surprisingly was the offer from the Treasury department to buy their shares. That would seemingly contradict my view that shareholder's equity will be wiped out (or reduced to some symbolic sum like in the Bear Stearns bailout.) in such a deal. While there is a small chance that this will be the end of it, and that this intervention will save the day for the shareholders, that is similar to the small chance that a lottery ticket you buy will give you a large sum of money.

The reason for this, as most stock investors seemed to realize given today's decline in Freddie's and Fannie's stocks, this bailout will require a lot more taxpayer cash in order to be successful. And it will likely be politically impossible to bail out the shareholders of Fannie and Freddie. Bailing out bond investors will appear controversial enough.


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