The Fannie/Freddie Bailout: Consequences to the U.S. Taxpayer

Includes: DIA, FMCC, FNMA, SPY
by: James Quinn

We now know that our government prefers to screw us on the weekend, while we are distracted by football games, errands, and laundry. I noticed that Paulson didn’t mention how much this would cost the American taxpayer during his speech. Two honest Americans, who have been right on this issue for the last two years, John Hussman and William Poole, have concluded that the tax bill will be $250 billion to $300 billion. Mr. Hussman’s analysis is as follows:

“A record 9.16% of U.S. mortgages were in delinquency (6.41%) or foreclosure (2.75%) as of June 30. This figure will likely be even worse in the third quarter report. With that January 2009 “sunset” provision now gone, I expect that U.S. taxpayers will be on the hook for about $250 billion in losses. Look – 9.16% of U.S. mortgages are already delinquent or in foreclosure, with the likelihood of further delinquencies and foreclosures in the coming quarters. On a $5.2 trillion book of mortgage loans between Fannie and Freddie, and a prevailing recovery rate of 50% on foreclosed properties, an overall loss of about 5% of this book, or about $250 billion, is a fairly conservative expectation.”

In an interview on Bloomberg News yesterday, William Poole had this to say:

William Poole, former president of the Federal Reserve Bank of St. Louis, said taxpayers may face a $300 billion bill to revive Fannie Mae (FNM) and Freddie Mac (FRE), the mortgage giants being taken over by the Federal government. "I would not be surprised if their total losses aggregate about 5 percent of their obligations" of about $6 trillion, Poole said today in an interview on Bloomberg Radio. "Five percent does not seem to me to be an outrageous guess."

To put $250 billion of losses in perspective, the tax bill of every household in America just increased by $2,300. You will not get a bill from the IRS because the government has chosen the immoral route of shifting this burden to your children and grandchildren. The U.S. Government has no money. It is broke. The $250 billion will be borrowed from the Chinese and Saudi Arabia, with an annual interest charge of $10 billion. This is $250 billion that will not be spent on education, infrastructure, or energy independence. It is the cost of financial recklessness of banks, greedy CEOs, and Americans who thought you could get something for nothing. Future generations will pay the price of our greed and malfeasance.

These actions by our clueless politician “leaders” will not solve anything. It will just keep this ponzi scheme going for a little while longer. Those who were tipped off of the announcement late Friday, probably made millions. Bank stocks mysteriously started to rise late on Friday. I’m sure the SEC is opening an investigation. These are the things that have not changed:

  • There are 4.7 million homes for sale representing an 11.2 month supply, the highest in history.
  • Home prices have fallen 16% in the last year according to the Case Shiller Index.
  • Foreclosures totaled 1.2 million in the 1st 6 months of 2008, a 100% increase over the prior year, and are accelerating at the fastest pace in 3 decades.
  • Based on historical home price relationships, we should expect a further 15% decline by 2010. This will result in further foreclosures.
  • Option ARM and Alt A delinquencies will be accelerating in 2009 based upon their issuance.
  • Unemployment is accelerating and will not peak until 2009, probably north of 7%.
  • We are in a recession that is being driven by consumers with too much debt. Consumer spending reductions will hurt retailers and mall developers tremendously.

So, enjoy Monday's 300 point rally in the Dow, while it lasts. If you are having some trouble making your mortgage payment, paying that huge electric bill, or making the minimum payment on your credit card, just call Hank Paulson at 1-800-BAILOUT.

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