Sunday, September 07, 2008

U.S. Government Nationalize Fannie & Freddie

It was inevitable, of course. Given the magnitude of the Fannie Mae & Freddie Mac losses from the housing bust, it was clear that only three options existed and that only one was politically realistic. The first option, to let Fannie & Freddie fail, was the soundest one in the long term, but since it would have produced significant short term pain it wasn't politically realistic. The second option, to bail out Fannie & Freddie including its shareholders, was also politically unrealistic since it would constitute a massive transfer of wealth to Fannie & Freddie shareholders, most of whom are rich Americans (though some may be owned by foreign governments and banks). Not politically realistic either in a time when low and middle income Americans experience falling real income.

The third option was to bail out Fannie & Freddie and its creditors, while wiping out shareholder's equity. While today's takeover by the government won't formally mean that preferred or even common stock holders will immediately loose their money, it will mean so in practice at least for common stock holders (first in line to absorb losses) and probably also for preferred stock holders (second in line to absorb losses).

The decision apparently came after auditors discovered that Fannie & Freddie had cooked the books and that many asserted asset values were inflated well above what honest accounting standards would justify.

Still though, for the foreign governments that have hold stakes in Fannie & Freddie this will likely come as a relief as they have mostly invested in bonds issued by Fannie & Freddie rather than stocks. I'm sure U.S. tax payers will be delighted to know how their tax dollars go to bailing out mercantilist foreign governments.


Blogger Robert Wenzel said...


You write that foreign governments hold sizable positions in Fannie and Freddie common stock, haven't seen any data on this. Do you have any?

If this was so I believe Treasury would have somehow included common in the bailout, since I believe it was China's holding of $300 billion in Fannie and Freddie debt, and their getting antsy about it, that prompted the Treasury to act now on the bailout

1:38 AM  
Blogger GS751 said...

I prefer to call them Fraudy and Faulty.

5:34 AM  
Blogger stefankarlsson said...

Robert, I expressed myself in a misleading way, thanks for pointing it out. It's changed now. I have too been unable to get any information about who owns the common stocks, so it was mere speculation from my part.

9:46 AM  
Anonymous John said...

You didn't mention that Fannie Mae and Freddie Mac (whose real names are "Federal National Mortgage Association" and "Federal Home Loan Mortgage Corporation" are in fact government constructions to begin with.

They have been state/private hybrids and getting massive government subsidies. It is of course because of this they managed to dig themselves into such a deep hole.

Hopefully they will chop them up and privatize them and learn the lesson of what happens when you mix politics and business.

1:50 PM  

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