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The ABCs of the Fannie Mae / Freddie Mac Problems

Bleh! It's not as bad as some people think. The Treasury line of credit can be substantially increased and an asset recovery agency will be formed to sell any bad assets that FRE/FNM ends up with beyond what's tolerable. Worst case scenario is that the FRE/FNM dividend get cut sharply. If not, there would be complaints that Fed rescue is fattening shareholders with big dividends. FRE/FNM are not going to be liquidated, nor will their stock got to zero. All of a sudden their financial status is a surprise? Don't be silly, as GSE's, they've been closely monitored since before the beginning of this crisis. They could have easily stopped buy the mortgage flow of the last 2-3 years (which i where all the killer junk is). Why didn't they? Because they are GSE's and have a mandate to buy! Even in a worst case scenario, with whatever concessions are made by FRE/FNM, there will be no more than a 50% dilution of the common. Why do I say that? Because never again will any smart money support any GSE of this type if the US bails on the FRE/FNM common holders. They are 95% owned by big institutions - mostly mutual funds on behalf of small investors. You think that Congress is going to let millions of Mom & Pops get killed financially over this? No way! It was the regulators job to be prepared for the current market conditions, which for trained regulators is a foreseeable event. Those regulators have a fiduciary duty to the public - which includes the common shareholders. If FRE/FNM fail, it's the regulators fault. I would go so far as to say that a Govt takeover of FRE/FNM would trigger "takings clause" lawsuits. The Government can't lawfully put private capital in a catch 22 and then seize it for no value. The common holders of FRE/FNM only put up their capital because they take it on faith that the regulators will see to it that the public mission of the GSEs is carried out soundly. I am absolutely certain the Govt is liable to the commons shareholders if these GSEs are pushed by regulators into insolvency, if they are not backstopped by the Feds or if they are seized ("nationalized"). The current panic in FRE/FNM has been major short seller attack - nothing more.