Ramifications of Fannie, Freddie On The U.S. Budget [Housing Tracker]

U.S. Considers Bringing Fannie Mae, Freddie Mac on to Budget.. “The Bush administration is considering how to fold Fannie Mae (FNM) and Freddie Mac's (FRE) $5.2 trillion in debt into the federal budget, the White House budget office and the U.S. Treasury Department said… The federal takeover of the government-sponsored enterprises on Sept. 7 failed to address whether the debt of Fannie and Freddie should be included in the budget, or whether it carries an explicit government guarantee… This week… Treasury Secretary Henry Paulson cited the “incongruities” in the law and said “we should be clear, is there a government guarantee or isn't there?” (Bloomberg, Sept. 11)  

Fannie Mae & Freddie Mac: Hedge Fund USA. “Economist Nouriel Roubini -- who has been spot on with his predictions so far -- called the Fannie Mae/Freddie Mac takeover "the greatest nationalization in the history of humanity." The action increased the government's public assets by almost $6 trillion and has increased its public debt and liabilities by another $6T. The capital costs could top $200B. He says the government essentially has created the world's largest hedge fund with a "debt to equity ratio of 30 ($6,000 billion of debt against $200B of equity)." (Seattle PI, Sept. 10)

Fannie Raises $7bn In Two-Year Issue. “Fannie Mae yesterday sold $7bn of bonds - its largest syndicated benchmark note ever... Fannie paid a risk premium of 70 basis points over comparable Treasuries for two-year debt, a sharp drop from similar bond sales just last month. The order book totaled more than $9bn, a person familiar with the transaction said. The two-year maturity made the Fannie issue particularly attractive since it essentially falls within the timeframe of the government's plan to explicitly backstop both Fannie Mae and Freddie Mac. The explicit backstop expires at the end of 2009. Longer-term plans for the GSEs remain unclear.” (Financial Times, Sept. 11)

Bailout For Billionaires. “Treasury Secretary Henry Paulson’s [rescue] gave a haircut to holders of both common and preferred stock. He [also] socked it to many small banks that had much of their capital in Fan or Fred shares… But, strangely, [he] gave Fan and Fred's subordinated debt holders an entirely free pass. Why? …Treasury's explanation is that it had to do this to reassure the world's holders of Fan and Fred senior debt. The argument seems to be that if subordinated debt holders took a loss, then senior debt holders might panic and run. And reassuring the Chinese and other holders of Fannie senior debt is the main point of this bailout.” (WSJ, Sept. 11)

Don't Blame Fannie/Freddie For the Budget. “Earlier this week, the Congressional Budget Office said it expected the deficit to widen to $407B in fiscal 2008, from $162B in 2007. The CBO expects a $438 billion deficit in 2009. The deterioration has nothing to do with Fannie and Freddie. The CBO blames weak tax receipts in a sluggish economy, along with increased spending on fiscal stimulus and covering the insured deposits of busted banks, among other things. Fannie and Freddie might do minimal fiscal damage in the grand scheme of things… The government could even make money on Fannie and Freddie in a housing-market recovery.” (WSJ, Sept. 11)

US Fiscal Challenge Is In The Long Term.  “Even the [US government] $5,400bn rise in measured gross liabilities – 40% of GDP – [from taking on Fannie/Freddie liabilities] gives no cause for panic... Since Treasury yields have hardly moved since the bail-out, the market is comfortable with the change in status… The government can now manage risks it was already bearing. The ultimate cost to the government depends… on the losses on the assets. These are unknowable. The government has set aside $200bn, about 1.4% of US GDP. It could well be less. In any case, net losses will be a fraction of gross liabilities… It is unlikely that subsequent rescues will be costlier than these.” (Financial Times, Sept. 11)

Next President Faces Swelling U.S. Debt. “CBO director Orszag says it's not possible to estimate how much the Fannie Mae and Freddie Mac takeover will add to government deficits. The key question will be how Congress and the White House Office of Management and Budget measure the companies' assets and liabilities when releasing its budget early next year.” (Christian Science Monitor, Sept. 11)

S&P release on Fannie Mae, Freddie Mac. “Standard & Poor's Ratings Services said today that it expects the U.S. Treasury's announcement that Fannie Mae and Freddie Mac had been placed in conservatorship by their regulator, the Federal Housing Finance Agency, and Standard & Poor's resulting rating actions on these entities (see 'Fannie Mae And Freddie Mac 'AAA/A-1+' Unsecured Ratings Affirmed; Preferred Stock Rating Cut,' published on Sept. 7, 2008) to have a minimal rating impact on synthetic collateralized debt obligation transactions in the Asia-Pacific region.” (Forbes, Sept. 9)

                                      
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Comments

[GMC:]

I hate to see the USA in this mess, but in my personal budget, if suddenly I have expenses I can't handle, I start looking for things to cut and ways to earn more money. It might be a good time to seriously curtail our international spending in places like Iraq and the UN, etc, etc. Take care of our personal needs first. You can't help others if you've been personally shot in the head.

2008 Sep 11 10:13 AM

[Jason Rines...:]

But that is the true issue 179505. Washington politicians leave office and pass the baton to the next sorry lot. After 25 years of baton passing roughly a decade of outright corruption and fleecing, there's not much left but to pass it all on to the American public. And so your ways to cut costs will be hampered by paying more in inflation or outright taxation while downward mobility hampers that way to earn more money. Washington needs an enima.

2008 Sep 11 06:33 PM

[TheBookkeeper:]

With all this responsibility heaped upon We The People We The People need, most of all, to become literate in a proper double-entry bookkeeping framework of rules.The financial community, its accountants, and it auditors have not a clue as to how a proper double-entry framework of rules monitors proper accounting practices Fixing the bookkeeping is our first line of defense if our future is to lead into a recovery. We have yet to see all of the failures that are already in the pipeline.

2008 Sep 11 06:58 PM