Just The Facts

Fannie & Freddie: Just the Tip of the Iceberg

>>> but how will financial markets absorb $50 or $100 trillion in triggered swaps? <<<


That's easy. There was an article on it today. The swaps require the bonds be bought back by the insurers, but the nationalization of the underlying debt guarantees that the market will pay full price for the underlying security. So the bondholders sell the debt back to the insurer, who then resells it back into the market at its full insured value. The debts basically became US Treasury Notes via the takeovers. If anything, some people will make a little money in commissions on all those transactions, as everyone honors their obligations and nothing changes (other than who holds the debt).


Maybe that's why the CBO came out today with their opinion that the liabilities of FNM and FRE are now liabilities of the US government and should be added to the national balance sheet.


The problem is, it just increased our national debt by 50 percent. Won't those who own our debt expect a corresponding increase in the rate of return on their investment, due to the increased risk? It's a lot harder to pay back $14.5 trillion than it is $9 trillion --- and especially so, with the economy entering a recession (or worse) and tax revenues declining. And two candidates running for President, one of whom is promising to cut tax revenue and the other who is promising to increase federal spending !!!


Expect the returns on US debt obligations to increase dramatically in the next few weeks. And that, of course, is going to wreak pure HAVOC on our federal budgets for the next several years.


I think we've seen the beginning of the end, for America as it is currently known ...


:(