Freddie/Fannie Takeover Talks Heat Up. Voom Needed.

According to the NY Times late tonight, discussions among senior U.S. government officials have heated up with respect to the U.S. taking over mortgage giants Freddie Mac and Fannie Mae. The structure being contemplated is a conservatorship, which is permitted under a 1992 law, and is one that would essentially wipe out the two firms' respective equity, while allowing their loans to be managed.

Strikes me this is officially crunch time. To put it in Seuss-ian terms, if Little Cat Z is anywhere in the neighborhood he needs to know Things 1,2, and 3 have flopped, and so he needs take the Voom out from under his hat. We may have gotten the pink cat ring out of the bath, but the resulting pink snow is now everywhere and getting deeper by the minute.

Somewhat more seriously, three things: First, as the Times points out tonight, most people have no idea the capital at risk here. A 10% decline, say, in Freddie/Fannie assets would be roughly the same -- $150-billion -- as another Iraq war.

Second, by taking on the companies' liabilities the U.S. government's total obligations would soar from $9-trillion to $14-trillion, almost certainly forcing rates much higher.

Third, it is a canard to say that the companies have the regulator-required capital. Because they do, but the levels are so low as to be meaningless, with Bear-plus-plus levels of resulting leverage.

Comments

[ggbbppl:]

thank you . are we in a depression?

2008 Jul 11 01:50 PM