Filed under: Market matters, Federal Natl Mtge (FNM), Headline news, Housing, Federal Reserve
The New York Times reports that the White Home has announced a plan which it will propose to Congress to bailout Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). So the executives at these companies will get to keep their millions in compensation and we will be on the hook for their mistakes. This is the what free markets mean for this White Home — private profits and socialized losses.
Here are three key terms of the deal:
- Purchase stock and let the Treasury finance short-term needs. The U.S. will buy billions in Fannie and Freddie stock and lend to the companies to meet their short-term funding needs.
- Provide emergency Fed funds. The Fed will provide Fannie and Freddie emergency access to its discount window as it has done already for the investment banking industry. Under this deal, the Fed will open a lending facility for Fannie and Freddie which they’ll access by posting their own securities as collateral.
- Raise the national debt. The White House will also call on Congress to raise the national debt limit — it has already risen from $5 trillion to $9.5 trillion during the current administration.
The taxpayers of America are now on the hook for $5 trillion worth of mortgages thanks to catastrophic mismanagement of the economy. Our only hope for a recovery of the risk we’re taking is that government ownership of Fannie and Freddie stock will overwhelm the selling power of those who are short the stock. If Fannie and Freddie recover, the government might one day have a meaningful profit. Otherwise it is just throwing good money after bad.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.
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