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New US President’s Nightmare: Fannie, Freddie & The Economy

Posted by SWARAAJ CHAUHAN, International Columnist in Economy.
Sep 9th, 2008 | Comments

The US federal government’s takeover of mortgage finance giants Fannie Mae and Freddie Mac not only “exposes the worst possible face of capitalism, one where a taxpayer guarantee is substituted for the old adage of buyer beware”, but also indicates the tough financial challenges ahead for the new president of America.

Whether it is Obama or McCain, whoever makes it to the White House at the end of this year would have to find ways to extricate the USA from the fiascoes that Iraq and Afghanistan misadventures have turned into. The taxpayers money is being squandered there and the economy lurches towards a crisis.

In entire history, Afghanistan has proved to be a graveyard of many ambitious and powerful empire builders.

The Australian adds that the two giants (Fannie and Freddie) are “the key players in the US housing sector that together hold, or guarantee, about $US5 trillion worth of home mortgages, and control 90 per cent of the US secondary mortgage market. Their debt is about 46 per cent of the size of the national debt.” And that’s not the end of the story…

“Federal officials are looking at how to tighten regulation of the credit card industry and whether to double loans to bail out the auto industry to $US50 billion ($60.11 billion).” More here…

Another report says: “The US Government’s rescue of Fannie Mae and Freddie Mac has added about $US5.4 trillion to potential Treasury liabilities from the two mortgage giants – a sum that is equivalent to the entire federal debt.

“In a series of moves culminating overnight, Washington took an unprecedented step into the financial sector in a bid to steady an ailing housing market and ease a global credit crunch, analysts said.

“The administration of George W. Bush effectively placed the struggling mortgage finance giants in a ‘conservatorship’, which is the equivalent of a bankruptcy reorganization under government aegis.” More here…

The BBC reports: “Overseas commercial banks – especially those in China and Japan – have directly invested billions of dollars in Freddie Mac and Fannie Mae. China’s three largest lenders – Industrial & Commercial Bank of China (ICBC), Construction Bank of China, and Bank of China – have $10.5bn directly invested in Freddie Mac and Fannie Mae between them.” More here…

The Economist says: “But on a fair-value basis, marking their assets to the current market price, Freddie is insolvent and Fannie not far off. Moreover, with house prices still sliding and foreclosures rising sharply, worse may be ahead.” More here…

(Photo above: US Treasury Secretary Hank Paulson)

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JSpencer

Privatizing the profits and socializing the losses. Sounds kind of familiar eh?

DLS

The Big Three are next. They were planning for a bailout before and they're more motivated than ever now. They were back on the radio this morning. Expect them to push for a big bailout (infusion of capital in the form of guaranteed loans) during the next several weeks.

DLS

As for the housing decline, it's far from over. Even the little things matter. For example, one very hard-hit place is one with explosive growth over the past several years, Las Vegas. Many of the homeowners facing foreclosure, of course, deserve no sympathy whatsoever; they deliberately overreached and wanted something effectively for nothing. Now that they're facing foreclosure, they resent losing their home, and their character is being exposed, as one bank official interviewed on the radio recently has reported. In several cases, the people, before leaving the homes, break the windows, punch holes in the walls, pour paint on the carpet, do other kinds of damage to the homes. This, of course, lowers housing values even more. Even the little things matter.

T-Steel

That is going on here in the Atlanta Metro area. People that "look like" they wouldn't tear up a home on the way out (because of foreclosure), become seasoned vandals. This area was big on "flipping houses" for profit. Now many of the flippers are facing foreclosures on multiple homes. Of course I'm not just blaming homeowners. Banks gave these loans while practicing zero risk assessment. Money got into their eyes and blinded them.

We're in deep excrement. And the Big 3 WILL get their bailout. And we'll be in deeper.

DLS

It's sickening to behold, T-Steel.

As to the Big Three and their bailout, well, there are multiple reasons why we can expect it.

1. First is the repetition of the Chrysler argument, that there are plants in many states (which affect many members of Congress), and the unemployment costs to governments (unemployment benefits and such) might exceed the costs of a bailout. In some places, the Big Three still affect much of the economy (ahem, such as here in Detroit). None of the foregoing loom anywhere as largely as they did in the early 1980s because the Big Three simply don't have the market share and "psychological share" of the public the way they used to (as I knew from as far back as...the early 1980s while still in California).

2. The economy is ailing right now and the GOP wouldn't like to see it get worse.

3. The GOP would like to steal from Obama something associated with Obama, just as the announcement of troop pullouts from Iraq and transfer to Afghanistan that Bush just announced. This is stealing an election-year issue from Obama.

4. The precedents have been set already, not only with Fannie and Freddie, but earlier with Bear Stearns. Why help an investment bank but not US industry?

But most amusingly from a political standpoint,

5. Michigan is an undecided, fully-contestible mega-state with several electoral votes available. These electoral votes give Michigan (the Big Three) leverage against the GOP. If the GOP declines to help them, the state could go Democratic.

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